Business Policy and Strategy IV

Strategic Management Cases

Dunkin’ Brands Group, Inc., 2015

www.dunkinbrands.com , DNKN

Headquartered in Canton, Massachusetts, Dunkin’ Brands (Dunkin’) sells hot and cold coffee and baked goods, as well as hard-serve ice cream, using a near-100 percent franchised business model. With 11,300 Dunkin’ Donuts restaurants in 40 states and 32 foreign countries, and 7,500 Baskin-Robbins restaurants in 43 states and 46 foreign countries, Dunkin’ is one of the world’s largest franchisors of quick-service restaurants (QSR). All but 36 Dunkin’ Donuts and Baskin-Robbins are franchisee-owned. In the last few years, more and more customers are coming into Dunkin’ restaurants and spending more and more money when they are there. About 70 percent of all Dunkin’ stores have a drive thru, which caters to consumers in a hurry. Dunkin’ is a speed leader among QSR, even given increased ticket volume and menu complexity.

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Dunkin’ recently launched a loyalty and rewards program that enables the company to collect data from customers to determine their habits. For example, if you normally visit Dunkin’ Donuts in the morning, the firm may soon send you offers to purchase some donuts in the afternoon or evening. Companies increasingly are using business analytics to make strategic decisions. Major rival firms in the coffee retailing business include Starbucks, Krispy Kreme Doughnuts, and Tim Hortons. Dunkin’ especially caters to the on-the-go consumer looking for a quick coffee and breakfast. One potential weakness for Dunkin’ is that the firm does not offer many healthy food options for health-conscious customers.

Coffee prices rose 50 percent in 2014 due to drought conditions in South America, especially since Brazil endured its worst drought in decades. The 2014 coffee harvest in Brazil was the lowest in three years. To take up the slack, Colombia, the world’s number-two Arabica grower, was increasing production, but Colombia only produces about one quarter as much coffee as Brazil.

Dunkin’ Brands is performing quite well. In mid-2015, Dunkin’ announced agreements with seven franchise groups to open 51 new restaurants in Virginia and West Virginia over the next several years. Of the seven groups, only one is a new franchisee while the rest are existing franchisees/franchise groups. For Q1 of 2015, the company’s revenues increased 8.1 percent year-over-year to $185.9 million, driven partly by revenue from the Dunkin’ K-Cup pack licensing agreement with Keurig Green Mountain, Inc.

Copyright by Fred David Books LLC.  www.strategyclub.com  (Written by Meredith E. David)

History

Independently in the 1940s, Bill Rosenberg founded the first Dunkin’ Donut restaurant, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Baskin-Robbins and Dunkin’ Donuts were acquired by Allied Domecq in 1973 and 1989, respectively, and renamed Dunkin’ Brands, Inc. in 2004. Allied was acquired in 2005 by Pernod Ricard, who soon sold the firm to Bain Capital Partners, LLC, The Carlyle Group, and Thomas H. Lee Partners, L.P. In 2011, Dunkin’ Brands became listed on the NASDAQ Global Select Market under the symbol “DNKN.”

Dunkin’ Donuts

Bill Rosenberg opened his first donut restaurant, Kettle Donuts, in 1948, in Quincy, Massachusetts. The name changed to Dunkin’ Donuts in 1950. Rosenberg sold franchisees to others as early as 1955. The 100th restaurant opened in 1963, the 1,000th in 1979, and the 3,000th in 1992. In 1996, bagels were introduced to the Dunkin’ Donuts menu and breakfast sandwiches the following year.

In 2013, Dunkin’ Donuts received the No. 1 ranking for customer loyalty in the coffee category by Brand Keys for eight years running, and was rated by CREST in December 2013 as number-one in iced regular/decaf/flavored coffee, number-one in hot regular/decaf/flavored coffee, number-one in donut category, and number-one in bagel and muffin category.

The following year, Dunkin’ Donuts reentered the United Kingdom, 20 years after it exited the country, with its first store opening in Harrow, London. In Canada, Dunkin’ Donuts has lost a substantial percent of its market share in recent years, and now has only five restaurants, all in Quebec. Dunkin’s Canadian decline is largely due to rival donut firm Tim Hortons.

Baskin-Robbins

In 1945, brothers-in-law Burt Baskin and Irv Robbins owned different ice cream parlors, Burton’s Ice Cream and Snowbird Ice Cream, both in Glendale, California. The separate companies merged in 1953 and the number of ice cream flavors increased to 31. That year, Baskin-Robbins hired Carson-Roberts Advertising who recommended adoption of the number 31 as well as the pink (cherry) and brown (chocolate) polka dots and typeface. In the 1970s, the company went international, opening stores in Japan, Saudi Arabia, Korea, and Australia. Baskin-Robbins was the first company to introduce ice cream cakes to the public, and the first to offer both hand scooped and Soft Serve ice cream. In some places, such as Malaysia, Baskin-Robbins gives 31 percent off their hand-packed ice cream on the 31st of a month.

Today, Baskin-Robbins is the world’s largest chain of ice cream specialty shops serving premium ice cream, specialty-frozen desserts, and beverages to more than 300 million customers annually. In 2014, the company was named the top U.S. ice cream and frozen dessert franchise by Entrepreneur magazine.

Vision/Mission

Dunkin’s vision statement is given on the corporate website as follows: “Serving Responsibly—To be recognized as a company that responsibly serves our guests, franchisees, employees, communities, business partners, and the interests of our planet.”

Dunkin’s mission statement is also given on the corporate website, but it is titled “Our Priorities.” The statement has four parts: Our People, Our Guests, Our Neighborhoods, and Our Planet. For example, regarding Our People, the statement reads: “From our employees and franchisees to the farmers who grow our coffee, we believe in treating everyone with respect and fairness so they are empowered to reach their goals.”

Organizational Structure

In 2014, Dunkin’ extended Chairman and CEO Nigel Travis’s employment contract through December 2018. Mr. Travis, age 64, joined Dunkin’ Brands as CEO in December 2008; his contract was to expire in 2016. Besides Mr. Travis, other top executives at Dunkin’ are listed in  Exhibit 1 . Notice there is no Chief Operating Officer and Mr. Travis is both the Chairman and CEO. Also notice there are no women or minorities among the top nine executives.

Exhibit 1

Dunkin’ Brands’ Organizational Chart

Source: Based on information at Dunkin’ Brands’ corporate website.

Figure 1 Full Alternative Text

Regarding Dunkin’s number of employees, since the company is nearly 100 percent franchised, workers are employed and paid by the franchisee, rather than by Dunkin’. Dunkin’ has no unionized employees.

Internal Issues

Strategy

Dunkin’ is opening 65 Dunkin’ Donuts stores in Brazil’s capital of Brasilia and surrounding states by 2016, through a licensing agreement with OLH Group. The new stores will be primarily in the capital city of Brasilia and the state of Goias. Dunkin’ also has plans to open an additional 80 stores in Brazil outside of the capital area by 2018. Dunkin’s largest South American presence to date is in Colombia with 171 restaurants. In 2014, Dunkin’ opened about 700 Dunkin’ Donuts and Baskin-Robbins stores worldwide. Store cannibalization is becoming a problem in some areas as the firm increasingly opens new stores in close proximity to existing stores. Dunkin’ restaurants are most heavily concentrated in the New England region of the United States. Dunkin’ franchisees are currently overhauling restaurant décor into a “sip and sit” atmosphere, with over 100 restaurants now offering soft seating areas, as well as high and low tables and stools. The new décor features earthy colors, contemporary lights, coffee-housed themed artwork, free Wi-Fi, power outlets, flat panel televisions, and digital menus.

To keep revenues flowing around the clock, Dunkin’ Donuts (and rival Starbucks) now offer more dinner-friendly foods. “Though breakfast remains our core, today people are seeking all-day dining, and they want to eat what they want, when they want it and where they want it,” says John Costello, Dunkin’ Donuts president of global marketing and innovation. Thus, Dunkin’ Donuts in late 2014 introduced a dinner staple (steak) and made a steak sandwich as well as a wrap with eggs permanent additions to its menu. Only 40 percent of Dunkin’ Donuts’ sales come after 11 AM, leaving a lot of room for growth in that arena, especially at the more than 2,300 Dunkin’ Donuts in the United States that are open 24 hours. Most Dunkin’ Donuts, Costello said, are open until 10 PM.

Sustainability

Dunkin’ Brands has a current Corporate Sustainability Report (CSR) posted on their website. The CSR details how Dunkin’ is progressing toward improving on its environmental goals and objectives. For example, the Dunkin’ Donuts & Baskin-Robbins Community Foundation (DDBRCF) recently partnered with Feeding America to support such initiatives as the BackPack Program to provide hungry children with nutritious and easy-to-prepare food to take home on weekends, and to support the School Pantry Program, which helps alleviate child hunger in America.

Franchise Fees

In the United States, Dunkin’ Donuts franchisees pay a royalty of about 5.4 percent of gross sales to the company, and Baskin-Robbins franchisees pay about 5.0 percent. However, outside the United States, Dunkin’ Donut franchisees, on average, pay a royalty rate of only 2.1 percent. For the Baskin-Robbins brand outside the United States, Dunkin’ does not generally receive royalty payments from franchisees; instead, it earns revenue from such franchisees by selling ice cream products to them, so the royalty rate in this segment is about 0.7 percent. Dunkin’ franchisees in the United States also pay advertising fees of about 5 percent of gross sales.

Segments

Dunkin’ Brands operates in four segments: (1) Dunkin’ Donuts U.S., (2) Dunkin’ Donuts International, (3) Baskin-Robbins International, and (4) Baskin-Robbins U.S. The two Dunkin’ Donuts U.S. and International segments generated 2014 revenues of about $568 million, or about 76 percent of the firm’s total segment revenues, of which $549 million was in the U.S. segment and $20 million was in the international segment. As calendar 2015 began, there were 11,275 Dunkin’ Donuts stores—8,047 in the United States and 3,228 in 32 countries outside the United States.

The two Baskin-Robbins segments generated 2014 annual revenues of about $122 million in the international segment and about $43 million in the U.S. segment. As calendar 2015 began, there were 7,546 Baskin-Robbins stores—5,068 were international in 46 countries outside the United States, and 2,478 were in the United States.

In Q4 of 2015, Dunkin’ Brands’ franchisees and licensees opened another 260 restaurants worldwide, including 141 Dunkin’ Donuts U.S. locations, 75 Baskin-Robbins International outlets, 46 Dunkin’ Donuts International units. Also, two Baskin-Robbins U.S. locations were closed. Additionally, Dunkin’ Donuts U.S. franchisees remodeled 172 restaurants during the quarter.  Exhibit 2  provides a breakdown of Dunkin’ Brands’ restaurants.

Exhibit 2

Dunkin’ Brands’ Number of Restaurants at Year-End

	2014	2013	2012
Dunkin’ Donuts U.S.	8,047	7,677	7,306
Dunkin’ Donuts International	3,228	3,181	3,043
Baskin-Robbins U.S.	2,478	2,467	2,463
Baskin-Robbins International	5,068	4,833	4,556
Total	18,821	18,158	17,368

Table 2 Full Alternative Text

Since Dunkin’ Brands is nearly 100 percent franchised, revenues derived from selling both ice cream and donuts to consumers is reported on the franchisees’ financial statements, rather than on Dunkin’s financial statements. Thus, the company generates revenue from five primary sources: royalty income and fees, rental income from restaurant properties leased, sales of ice cream products to franchisee, retail store revenue at company-owned stores, and licensing of the Dunkin’ Donuts brand for products sold in nonfranchised outlets (such as retail packaged coffee).

	2014 # Stores	2013 # Stores
South Korea	902	827
Middle East	338	386
Other	1,941	2,015
Total	3,181	3,228
Dunkin’ Donuts U.S.
Income
Royalty income	$362,342	$337,170
Franchise fees	36,192	29,445
Rental income	91,918	92,049
Sales at company-owned stores	24,976	22,765
Other revenues	5,751	3,970
Total revenues	521,179	485,399
Segment profit	379,751	355,274
Dunkin’ Donuts International
Income
Royalty income	$14,249	$13,474
Franchise fees	3,531	1,715
Rental income	133	179
Other revenues	403	117
Total revenues	18,316	15,485
Segment profit	7,479	9,670

Outside the United States, Dunkin’ stores are predominantly located in Asia and the Middle East, which accounted for about 70 and 16 percent, respectively, of international franchisee-reported sales in 2014.

Dunkin’ Donuts

The Dunkin’ Donuts brand has evolved into a predominantly coffee-based concept, with approximately 57 percent of Dunkin’ Donuts’ U.S. franchisee-reported sales for fiscal year 2013 generated from coffee and other beverages. Dunkin’ Donuts has centralized manufacturing locations (CMLs) that are franchisee-owned and operated for producing donuts and bakery goods. The CMLs deliver freshly baked products to Dunkin’ Donuts restaurants on a daily basis with consistent quality. At year-end 2013, there were 114 Dunkin’ CMLs of varying size and capacity in the United States. However, some Dunkin’ Donuts restaurants produce donuts and bakery goods on-site rather than relying on CMLs. Some of those stand-alone Dunkin’ Donuts restaurants supply other local Dunkin’ Donuts restaurants that do not have access to CMLs.

Dunkin’s coffee supplier, National DCP LLC, hedges coffee prices with farmers, protecting Dunkin’ from rapid swings in coffee price. Coffee prices have been rising of late, due to inclement weather, especially a drought in South America. Consequently, the price of Robusta coffee beans is high, whereas Arabica coffee bean prices are lower. Dunkin’ is positioned well somewhat because on the Dunkin’ website, it says, “We use 100% Arabica coffee beans.”

Exhibit 3  provides a breakdown of Dunkin’ Donuts’ restaurants outside the United States, and income globally.

Baskin-Robbins

Dunkin’ Brands outsources all its manufacturing and distribution of ice cream products for the domestic Baskin-Robbins brand franchisees to Dean Foods. Dunkin’s Baskin-Robbins U.S. segment has reported comparable store sales growth in each of the last three fiscal years. The company’s “31 flavors” offer consumers a different flavor for each day of the month. Baskin-Robbins USA franchise system has sales of about $520 million, or 5.5 percent of Dunkin’s global franchisee-reported sales.

About 65 percent of Baskin-Robbins restaurants are located outside of the United States and operate primarily through joint ventures and country or territorial license arrangements with “master franchisees.” The Baskin-Robbins international franchise system, predominantly located across Asia and the Middle East, generated franchisee-reported sales of $2.0 billion in 2013, or 22.1 percent of Dunkin’ Brands’ global franchisee-reported sales.

The number of Baskin-Robbins outside of the United States are revealed in  Exhibit 4 , as well as the segment’s income globally.

Exhibit 3

The Number of Dunkin’ Donuts Outside the United States and Income Globally (in thousands of USD)

Table 3 Full Alternative Text

Exhibit 4

The Number of Baskin-Robbins Outside the United States and Income Globally (in thousands of USD)

	2014 # Stores	2013 # Stores
South Korea	1,065	1,106
Japan	1,157	1,170
Middle East	706	754
Other	1,805	2,030
Total	4,833	5,068
Baskin-Robbins U.S.
Income
Royalty income	$25,728	$25,768
Franchise fees	1,160	775
Rental income	3,420	3,949
Sales of ice cream products	3,808	3,942
Sales at company-owned stores	—	157
Other revenues	8,036	7,483
Total revenues	42,152	42,074
Segment profit	27,081	26,274
Baskin-Robbins International
Income
Royalty income	$9,109	$9,301
Franchise fees	1,665	1,292
Rental income	535	561
Sales of ice cream products	108,435	90,717
Other revenues	589	104
Total revenues	120,333	101,975
Segment profit	54,321	42,004

Table 4 Full Alternative Text

Finance

Dunkin’ Brands’ revenues in 2014 were $748.7 million, up 4.9 percent year over year. Adjusted earnings per share were $1.74, up 13.7 percent over the prior year. For that quarter, Dunkin’ Brands declared a quarterly dividend of 26.5 cents per share of common stock, an increase of 15 percent from the prior quarter. The increased dividend was paid on March 18, 2015 of record as of March 9.

Dunkin’ Brands’ income statement and balance sheet are provided in  Exhibits 5  and  6 , respectively.

Exhibit 5

Dunkin’ Brands’ Income Statement (in thousands of USD)

Report Date	December 27, 2014	December 28, 2013
Revenues	$748,709	$713,840
Operating expenses	432,535	436,631
Operating income	22,684	27,527
EBIT	338,858	304,736
Interest	83,125	86,648
EBT	255,733	218,088
Tax	80,170	71,784
Other items	794	599
Net income	176,357	146,903

Source: Based on p. 52 in Dunkin’s 2014 Form 10K.

Table 5 Full Alternative Text

Exhibit 6

Dunkin’ Brands’ Balance Sheet (in thousands of USD)

Report Date	December 27, 2014		December 27, 2013
Cash	$208,080		$256,933
Accounts receivable	105,060		79,765
Inventories	—		—
Other current assets	129,478		125,062
Total current assets	442,618		461,760
Property, plant & equipment	182,061		182,858
Equity investments	164,493		170,644
Goodwill & intangibles	2,317,167		2,343,803
Other assets	71,044		75,625
Total assets	3,177,383		3,234,690
Short-term debt	3,852		5,000
Accounts payable	13,814		12,445
Other current liabilities	337,853		326,853
Total current liabilities	355,519		344,298
Long-term debt	1,807,081		1,818,609
Deferred income taxes	540,339		561,714
Other liabilities	99,494		97,781
Total liabilities	2,802,433		2,822,402
Noncontrolling interest	6,991		4,930
Common stock	104		107
Retained earnings	(711,531)		(779,741)
Treasury stock	—		(10,773)
Paid in capital and other	1,079,386		1,197,765
Total equity	367,959		407,358
Total liabilities, noncontrolling interest, & equity	3,177,383		3,234,690

Source: Based on p. 51 in Dunkin’s 2014 Form 10K.

Table 6 Full Alternative Text

Competitors

There are thousands of “mom-and-pop” doughnut shops globally. However, Krispy Kreme Doughnuts (KKD), Starbucks, Dunkin’ Brands Group, and Tim Hortons (now owned by Restaurant Brands) are dominant rivals, and have been increasing coffee and doughnuts sales annually. For example, total sales in 2014 for KKD, Starbucks, and Dunkin’ Brands Group, increased 6.5, 10.1, and 4.9 percent, respectively. All four companies have aggressive expansion plans. Krispy Kreme Doughnuts is in an aggressive growth mode and plans to expand in a way similar to that of Dunkin’ Brands, which plans to double its Dunkin’ Donuts store count to around 15,000 in the United States alone. Krispy Kreme plans to increase its 800 stores worldwide to 1,300 by 2017.

Exhibit 7  provides some comparative information about Dunkin’ Brands, Krispy Kreme Doughnuts, and Starbucks. Revenue per employee is not really applicable due to franchising, whereas the persons are employees of the franchisee and not Dunkin’.

Exhibit 7

Dunkin’ Donuts versus Rival Firms

	Dunkin’	Krispy Kreme	Starbucks
# Employees	1,150	2,500	191,000
$ Net Income	$176 M	$34 M	$2,068 M
$ Revenue	$748 M	$460 M	$16,447 M
$ Revenue/Employee	NA	$184,000	$86,110
$ EPS Ratio	$1.65	$0.55	$3.30
Market Cap.	$5.0 B	$1.4 B	$66.7 B

Table 7 Full Alternative Text

Starbucks Corporation (SBUX)

Starbucks is the world’s largest specialty coffee retailer with more than 18,000 coffee shops in 60 countries. It offers coffee drinks and pastries, roasted beans, coffee accessories, and teas. The company owns about 9,400 of its own shops (mostly in the United States), while licensees and franchisees operate roughly 8,650 units worldwide (primarily in shopping centers and airports). In 2014, Starbucks began offering beer and wine, as well as fancy snacks, chicken skewers, chocolate fondue, and other items. By year-end 2014, only 40 Starbucks offered these new items. The company also owns the Seattle’s Best Coffee and Torrefazione Italia coffee brands. Starbucks markets its coffee through grocery stores and licenses its brand for other food and beverage products. The company is determined to get the afternoon and evening customer, whereas historically it has mainly been a breakfast place. That is why the beer, wine, and more food is being rolled out at more and more Starbucks outlets.

The company sees afternoon and dinner also as a way to differentiate itself from Dunkin’ Donuts and Krispy Kreme Doughnuts that historically have been more about quick service than sit down and stay, which is the venue Starbucks plans to enter aggressively globally. Starbucks now offers 10 standard small dinner plates as part of its evening menu, such as truffle macaroni and cheese. There are also five choices of red wine, three white wines, a sparkling rose, and prosecco.

Krispy Kreme Doughnuts (KKD)

Krispy Kreme Doughnuts is chain of doughnut outlets with about 695 locations throughout the United States and in about 20 other countries. The shops are popular for their glazed doughnuts that are served fresh and hot out of the fryer, as well as cake and filled doughnuts, crullers, and fritters. Hot coffee and other beverages also are sold. KKD outlets are almost all owned and operated by franchisees; the company owns and operates 90 locations. Aside from doughnuts and coffee, no other food items of substance are offered. The company markets its doughnuts through grocery stores and supermarkets.

Green Mountain Coffee Roasters Inc. (GMCR) and KKD have agreed to widen the homemade single-serve coffee options for Keurig users, whereby KKD’s upcoming coffees—Smooth and Decaf—will be available in K-Cup packs for Keurig brewers. Krispy Kreme’s K-Cup packs will be available at the online shopping sites of Keurig and KKD, along with the participating KKD shops, grocery, and many other retail outlets. The convenience of Keurig brewers will enhance the popularity of KKD coffee among Keurig fans.

The fiscal fourth-quarter results for KKD on March 12, 2014, saw revenue rise 3.3 percent to $112.7 million. Company-owned same-store sales rose 1.6 percent, and franchise same-store sales soared 6.7 percent. Adjusted net income grew 37 percent to $8.3 million. It was the fifth full year and 21st quarter in a row of same-store KKD sales gains.

Tim Hortons, Inc

Tim Hortons is Canada’s leading quick-service restaurant brand, having more than 4,250 coffee and donut shops across the country, and in several U.S. states. Tim Hortons was acquired by Burger King Worldwide in late 2014 in an $11 billion deal, and BKW immediately created Restaurant Brands International (RBI). RBI is now the second largest global quick-service restaurant in the world. Today, BKW is headquartered in Oakville, outside of Toronto, Canada.

The Tim Horton menu features a variety of coffees and cappuccino, along with donuts, Dutchies, bagels, and other baked goods. In addition, Tim Hortons serves a lunch menu of soup, sandwiches, and chili. The chain includes freestanding as well as kiosk and mall-based outlets; all but about 20 of the locations are operated by franchisees. The company owns the Cold Stone Creamery ice cream shop chain. Tim Hortons’ revenues in a recent quarter increased 10.7 percent, and adjusted earnings-per-share grew 6 percent.

External Issues

Barriers to Entry

Barriers to entry are relatively low for the restaurant industry, but rivalry (competitiveness) among firms is exceptionally high. One large contributing factor for the low barriers to entry is many small entrepreneurs can open mom-and-pop establishments and bypass the franchise fees, royalties, selection process, and so on, of owning a franchised restaurant and lease an existing building at a relatively low price. There are thousands of mom-and-pop donut shops across the United States and likely tens of thousands of small ice cream places. However, even avoiding high fixed costs, variable costs are often high, and small-scale entrepreneurs are not able to compete with larger franchise stores that can better negotiate pricing on food, packaging, and other supplies. In the QSR industry, the bargaining power of consumers is quite powerful, availability of restaurant options in most places is abundant, and consequently there is intense price competitiveness among rival firms. Even if you are sure you want a donut or ice cream, you likely have many options.

Future

Dunkin’ Brands reported slower sales growth slow in Q4 of 2014 as it faced intensifying competition for on-the-go customers in the mornings. Sales for Dunkin’ Donuts USA edged up 1.4 percent in the period, down from the growth of 3.5 percent a year ago. Analysts say the slowdown comes as more competitors have pushed into the breakfast category, a relative bright spot in the fast-food industry. For example, Yum Brands’ Taco Bell segment recently reported that its quarterly sales rose 7 percent in its U.S. locations, boosted by its national breakfast launch. Dunkin’ CEO Nigel Travis says, “If you think about it, everyone’s getting into the breakfast space.”

Rival Burger King provides breakfast and coffee to millions of customers through thousands of restaurants located near Dunkin’ Donuts restaurants. Now, in addition, Burger King owns Tim Hortons, and looks to put those restaurants near Dunkin’ Donuts restaurants, especially in the northeastern United States. CEO Nigel Travis at Dunkin’ Brands needs a three-year strateg

Krispy Kreme Doughnuts, Inc., 2015

www.krispykreme.com , KKD

Headquartered in Winston-Salem, North Carolina, Krispy Kreme Doughnuts (KKD) serves doughnuts and coffee as well as other snack items. The company has locations in 23 different countries. Many Krispy Kreme shops are factory shops where customers can watch doughnuts being made and purchase fresh hot doughnuts as well. The factory stores are responsible for servicing local grocery stores and convenience stores. The KK Supply Chain provides raw materials for both franchise and company-owned stores in the doughnut-​making process. Krispy Kreme storeowners must purchase all materials from KK Supply Chain. Krispy Kreme reported total revenues in fiscal year end February 2015 of $490 million (up from $460 million the prior year) with about 90 percent of revenues derived from the United States.

For the fiscal first quarter (Q1) of 2015, Krispy Kreme’s revenue rose 9 percent year-over-year to $132.5 million, driven almost entirely by a 17.3 percent increase in Krispy Kreme’s store count. For that quarter, the company’s domestic same-store sales rose 5.2 percent, but its international franchise same-store sales declined 1.7 percent. Overall for Q1 of 2015, the company’s adjusted net income was $16.6 million, or $0.24 per share. The company’s EPS number was up at least by the KKD buying back 391,300 shares of its stock for $7.4 million.

History

Krispy Kreme traces its roots back to 1933 when Vernon Rudolph bought a doughnut shop in Paducah, Kentucky. After selling doughnuts in Kentucky, Tennessee, and West Virginia, the store known today as Krispy Kreme was moved to Winston-Salem. Krispy Kreme doughnuts were sold to grocery stores at first, but became so popular with customers that they requested the option to buy the doughnuts fresh and hot from the store, thus launching the doughnut factory retail store and selling directly to the public.

Krispy Kreme grew quickly over the next four decades before being sold to Beatrice Foods Company in 1976. Shortly after the purchase by Beatrice, in 1982, several Krispy Kreme franchisees purchased the company back from Beatrice Foods and quickly established the current Doughnut Theater style of factory stores where by customers can watch doughnuts being made. It was not until 1996 that KKD finally expanded outside the Southeast by opening a store in New York City, followed in 2001 by opening its first store outside the United States, in Canada. The company went public with its IPO launch in April 2000.

In the United Kingdom, KKD just concocted a single, gigantic box that holds 2,400 doughnuts. The box (11.4 feet by 3 feet) was filled with doughnuts and required eight KKD employees to deliver it to 360 Resourcing Solutions. The box was part of a promotion for the new “Krispy Kreme Occasions” division that customizes doughnut offerings for corporate events or special occasions such as weddings and other celebrations. The division sells doughnut “towers” for special events or even personalized doughnuts with customized, chocolate nameplates or corporate logos. The company has no plans to create another box, but it is happy to sell 100 of the so-called double-dozen boxes for about $2,600.

Krispy Kreme opened its first store in India in 2013 in Bangalore, Karnataka, and now there are seven in that city. Also in 2013, KKD began opening stores in Colombia, with a total of 25 planned, as the first South American country for the company. In late 2013, KKD opened its first store in Taipei, Taiwan. In 2014, KKD opened its first shop in Chennai in southern India.

Internal Issues

Vision/Mission

Krispy Kreme Doughnuts does not appear to have a published vision statement. The company’s mission statement, however, is given as follows:

Consumers are our lifeblood, the center of the doughnut There is no substitute for quality in our service to consumers Impeccable presentation is critical wherever Krispy Kreme is sold We must produce a collaborative team effort that is unexcelled We must cast the best possible image in all that we do We must never settle for “second best;” we deliver on our commitments We must coach our team to ever-better results.

(Source: Company documents)

Distribution

Krispy Kreme doughnuts are sold in KKD stores, grocery stores, convenience stores, gas stations, Walmart, and Target stores in the United States. Internationally, the doughnuts are sold in Loblaws supermarkets, Petro-Canada gas stations, and as freestanding stores in Canada, along with BP Service Stations and BP Travel Centers and 7-Eleven stores in Australia. In the United Kingdom, Tesco supermarkets, Tesco Extra, and most Tesco service stations carry KKD products, and service stations Moto, Welcome Break, and Road Chef also carry self-service KKD cabinets. Today, KKD has locations in the United Kingdom, Australia, Turkey, the Dominican Republic, Kuwait, Mexico, Puerto Rico, Taiwan, South Korea, Malaysia, Thailand, Indonesia, the Philippines, Japan, China, the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, Hong Kong, and Ethiopia.

Organizational Structure

As illustrated in  Exhibit 1 , KKD basically has two segments: USA and International. Note the company does not have a Chief Operating Officer (COO), Chief Administrative Officer (CAO), or Chief Strategy Officer (CSO). However, KKD reports revenues by geographic region, but is not structured geographically. In fact, the company appears to be structurally functionally, rather than divisionally.

Strategy

Krispy Kreme Doughnuts has long prided itself on hot fresh doughnuts and a one of a kind taste. As you can easily watch at a KKD factory store Doughnut Theater, the original glazed doughnut is fried before it heads toward a glazing waterfall to be covered in a sugary signature glaze. There is only one supplier of KKD’s signature glaze. In addition to entertaining guests, KKD feels the Doughnut Theater also reveals the firm’s commitment to quality and freshness. To help attract customers into the store, the original hot doughnuts sign is lit during peak production hours, generally early in the mornings and late at night, when customers are most likely to visit the stores. In essence, KKD’s strategy is hot fresh doughnuts, but the firm also sells its products in gas stations, grocery stores, and other retail outlets. About 50 percent of all KKD revenue is derived from wholesale outlets, so the firm plans to work on ways to improve the freshness and quality of its doughnuts sold in various retail locations.

The company is transitioning toward smaller factory shops that will focus on retail rather than wholesale customers. This strategy appears more in line with the firm’s new marketing approach. Many new stores in the southeastern United States will be company owned, whereas new smaller factory stores outside the southeast are more likely to be operated under franchisee agreements.

Krispy Kreme Doughnuts has long helped the communities with fund-raisers, even offering special packaging at times. Fund-raisers are under the firm’s “local relationship marketing” strategy. The company does a good job attracting customers from local businesses and families. About 55 percent of all domestic transactions are for doughnut orders of 1 dozen or more. However, this is also partly explained by the volume discount provided for such orders. International orders of a dozen or more doughnuts at a time are a significant portion of sales as well, indicating that doughnut consumption habits are more homogeneous globally than some may believe. The company likes to mention homogeneity as a part of its “sharing concept,” which is a key aspect of the firm’s global marketing strategy.

In early 2014, KKD and Keurig Green Mountain Coffee agreed to create both decaf and regular Krispy Kreme coffee for Keurig coffee makers. Customers can purchase the products at both Keurig and KKD websites as well as at KKD factory stores, grocery, retail, and other channels throughout the United States. Krispy Kreme also has a new line of iced coffee. About 89 percent of all KKD’s retail sales are derived from doughnuts, with the industry average closer to 50 percent of sales being derived from doughnuts. KKD is late to capitalize on selling coffee and other drinks, but the company is making efforts.

Krispy Kreme Doughnuts is broken down into (1) Company Stores, (2) Domestic Franchise, (3) International Franchise, and (4) KK Supply Chain. Company Stores and Domestic Franchise stores are similar, only differing in ownership. Both Company Stores and Domestic Franchise Stores consist of full factory stores and satellite stores. International Franchise Stores are designed the same way as Company Stores and Domestic Franchise with 125 factory stores and 449 satellite shops in foreign markets. KK Supply Chain supplies both Company and Franchise stores, which all are required to purchase its products from KK Supply Chain.

As of February 2015, there were 278 KKD stores operating domestically in 38 states and in the District of Columbia, and another 523 shops in 23 other countries around the world. The company has plans to grow international stores to 900 by January 2017.

Krispy Kreme Doughnuts’ revenue by geographic region is provided in  Exhibit 2 . Note the nice increases everywhere except in the Other Americas.

Exhibit 2

KKD’s Revenues by Geographic Region (in thousands of USD)

	February 2015	February 2014
United States	$438,801	$412,743
Other Americas	9,973	10,000
Asia/Pacific	28,575	25,460
Middle East & Europe	12,985	12,128
Total Revenues	490,334	460,331

Source: Based on KKD Annual Report, 2015, page 23.

Table 2 Full Alternative Text

Revenues and operating income by company-owned versus franchised stores are provided in  Exhibit 3 . Notice nice increases across the board, with international franchise lagging slightly.

Exhibit 3

KKD’s Revenues by Company-Owned versus Franchise (in thousands of USD)

	Revenues	Operating Income
	February 2015	February 2014	February 2015	February 2014
Company Stores	$325,306	$306,825	$9,287	$11,334
Domestic Franchise	13,450	11,839	8,103	8,083
International Franchise	28,598	25,607	20,026	17,977
KKD Supply Chain After Adjustments	122,980	116,060	41,823	36,953
Totals	490,334	460,331	79,239	74,347

Krispy Kreme Doughnuts’ revenues by retail versus wholesale are provided in  Exhibit 4 . Note that retail sales are the highest, accounting for 49 percent of 2014 revenues. However, collectively, wholesale sales accounted for 51 percent of total revenues led by grocers and mass merchants such as Walmart at 31 percent of total sales.

Finance

The fiscal year for Krispy Kreme Doughnuts ends in February. The company had an outstanding 2013 (ending February 1, 2014) on most financial areas. The firm’s stock price was up over 100 percent, revenues increased 6 percent, and the company reported a 65 percent increase in net income. Much of the increases can be attributed to opening 80 new locations around the world, but KKD also reported 6.7 percent increase in comparable store sales. The company’s CEO indicated in the spring of 2014 that overseas markets remain strong for the firm, with many new store openings having long lines for up to 3 months after opening. The CFO, Douglas Muir, retired in 2015, turning the reins over to Price Cooper. Also, KKD is increasing its $80 million stock buyback to $105 million in 2015.

The company’s most recent income statement and balance sheet are provided in  Exhibits 5 and  6 , respectively.

Exhibit 5

Income Statement (in millions of USD)

Report Date	February 2, 2015	February 2, 2014
Revenues	$490	$460
Operating expenses	441	413
EBIT	49	47
Interest and other benefit	0.8	1.5
EBT	48	45
Tax	18	10
Net income	30	34

Source: Based on KKD’s 2015 Annual Report.

Table 5 Full Alternative Text

Exhibit 6

Balance Sheet (in millions of USD)

Report Date	February 2, 2015	February 2, 2014
Assets
Cash and equivalents	$51	$56
Accounts receivable	28	25
Inventories	18	17
Deferred tax	23	23
Other current assets	8	6
Total current assets	128	127
Property, plant, & equipment	116	93
Goodwill and intangibles	30	24
Deferred tax	68	83
Other assets	11	11
Total assets	353	338
Liabilities
Short-term debt	—	—
Accounts payable	49	17
Taxes	1	2
Other current liabilities	0	27
Total current liabilities	50	46
Long-term debt	9	2
Other liabilities	26	25
Total liabilities	85	73
Common stock	311	338
Retained earnings	(43)	(73)
Total equity	268	265
Total liabilities & equity	353	338

External Issues

The doughnut market in the United States is a $13 billion industry, with about 25 percent of sales coming from bulk doughnuts in the 1 dozen-size box and up. Another 40 percent of sales come from drinks with half of this being derived from coffee. Major rival Dunkin’ Brands accounts for much of these sales with their popular coffee offerings. Yeast doughnuts account for about 10 percent of industrywide sales. Doughnut holes and other varieties account for about 10 percent. There are thousands of “mom-and-pop” doughnut and coffee shops globally.

Eating Healthy

Both in the United States and globally, people are becoming more health conscious in their diet and food choices. In addition, as society becomes more litigious, firms competing in the fast-food industry, including doughnut shops, have become much more mindful of product labeling and ingredients used. Low-carb diets are still extremely popular worldwide and many have even made low-carb eating a lifestyle. Some cities and other governments around the world, for example, are imposing laws that restrict portion sizes of soft drinks and other sugary-laden snack sizes. Competitors of KKD, including Dunkin’ Brands and Starbucks, have already diversified their menu options to include healthier choices. However, still, when most people want a doughnut, they want it to taste good and view it as a treat, so the outlook for doughnut shops remains positive, especially outside of North America, where the market is not saturated.

Coffee Prices

Like many commodities, the price of coffee is subject to wild price fluctuations. Brazil accounts for about 40 percent of worldwide coffee production. Droughts in Brazil, fungal infections, and deforestation of the rain forest have caused prices to swing greatly. The fungal infection in 2014 accounted for $1 billion in lost revenues; coffee production could drop as much as 40 percent in the coming years. Also, a global acceptance to “fair trade” providing farmers a fair wage and educational programs for their farming efforts has also contributed to higher prices. In addition, a growing middle class in developing countries has provided upward pressure on coffee prices. In total, coffee prices doubled from 2013 to 2014. The good news for consumers is that coffee prices paid will not be felt much more than a nickel or dime per cup at a restaurant, according to most analysts.

Competitors

Top doughnut competitors are Dunkin’ Brands, Tim Hortons, as well as Starbucks for coffee and other snacks. The global market looks promising for American donut firms and Canadian-based Tim Hortons. Dunkin’ Brands accounts for about 54 percent of the total doughnut shop market share. Krispy Kreme and Tim Hortons each account for about 5 percent of the U.S. doughnut market share. Regarding coffee shops, Starbucks accounts for 35 percent, Dunkin’ Brands for 25 percent, and Tim Hortons and KKD 2 percent each of the U.S. coffee shop market share in total revenues.  Exhibit 7  shows the summary financial information for KKD and its rival firms.

Exhibit 7

Summary Financial Information for KKD versus Rival Firms

	Krispy Kreme	Dunkin’ Brands	Starbucks
# Employees	2,800	1,584	191,000
$ Net Income	30 M	176 M	2,068 M
$ Revenue	490 M	749 M	16,477 M
$ Revenue/Employee	175,000	473,000	86,000
$ EPS Ratio	0.46	1.70	1.69
Market Cap.	1.24 B	5.32 B	81.83 B

Source: Based on company documents.

Dunkin’ Brands Group (DNKN)

Headquartered in Canton, Massachusetts, Dunkin’ Brands is a global distributor of coffee, baked goods, and their famous ice cream served under the Baskin Robbins name brand. There are 11,000 Dunkin’ Donuts restaurants in 40 states and 32 foreign countries, as well as 7,300 Baskin-Robbins restaurants in 43 states and 46 foreign countries. Many Dunkin’ Donuts restaurants also contain a Baskin-Robbins within them, and all but 36 Dunkin’ Donuts and Baskin-Robbins stores are franchisee owned. About two thirds of all Dunkin’ restaurants in the United States have a drive-through that caters to customers, especially morning customers on their way to work. The majority of Dunkin’ Donuts and Baskin-Robbins stores outside the United States are located in Asia and the Middle East, with South Korea and Japan having the most stores.

After an infusion of cash from going public with its IPO in 2011, Dunkin’ started to aggressively expand within the United States and internationally, opening 700 Dunkin’ Donuts and Baskin-Robbins worldwide in 2014 alone. Dunkin’ is opening 65 stores in Brazil between 2014 and 2016. The company is also introducing a European flavor to over 100 restaurants that now offer soft seating areas with low tables in earthy colors and contemporary lights. Implemented in 2014 was a company rewards program that enables Dunkin’ to understand its customers better and learn ways to meet their demand and desires more efficiently.

With 99 percent of all Dunkin’ Donuts stores under the franchisee system, most of Dunkin’s revenues are derived from a 5.4 percent royalty payment franchisees pay on gross sales to the company. Baskin-Robbins franchisees pay around 5.0 percent. These numbers are U.S.-based only, as international based Dunkin’ and Baskin-Robbins pay 2.1 percent and 0.7 percent royalty rates, with Baskin-Robbins stores also paying for certain ice cream products. U.S.-based stores also pay advertising fees of 5 percent of gross sales.

Financially, 2014 was a banner year for Dunkin’ Brands with revenues increasing 5 percent to $748 million, buoyed by 790 new restaurants that were opened worldwide in 2013 with 439 of these outside the United States. With new additions and improving business and prospects in foreign markets, Dunkin’, like KKD, also experienced a large increase in net income of around 17 percent in 2014. Also noteworthy of late is Dunkin’s increases in royalty income, franchise fees, and higher margins on Baskin Robbins ice cream products.

Tim Hortons

Tim Hortons is the largest doughnut and coffee retailer in Canada. Founded in Hamilton, Ontario, in 1964, the firm sells premium coffee, espresso, teas, and many other hot and cold beverages including fruit smoothies. Food items sold include soups, sandwiches, wraps, and many other choices. The company’s mainstay, however, is donuts for which the firm was founded. There are over 850 Tim Hortons locations throughout the United States. The company also offers its products in self-service kiosk machines. In 2014, the company generated over $634 million in the United States alone. Tim Hortons was recently acquired by Burger King Worldwide.

Starbucks

Starbucks is the world’s largest specialty coffee retailer with over 18,000 stores in 60 different countries. In addition to offering a variety of hot and cold coffee drinks, Starbucks also offers pastries, muffins, cookies, and other dessert-type items. As of 2014, Starbucks expanded its line of products to include beer, wine, chocolate fondue, and even chicken skewers at around 40 of its locations. The company also owns Seattle’s Best Coffee and Torrefazione Italia coffee brands. Customers frequently purchase Starbucks coffee and ready-made coffee drinks at grocery stores, gas stations, and department stores.

An important way Starbucks has historically differentiated itself from rivals KKD and Dunkin’ Brands was by its perception as a more premium coffee offered in a variety of flavors. With Dunkin’ Brands responding similarly with its product line, Starbucks is now using sales of beer, wine, and upgraded snacks and food as a means of attracting customers in the late afternoon and early evening—a time when sales are historically slower. Starbucks also maintains its position as more of a sit-down-and-relax establishment, unlike most KKD and Dunkin’ Donuts stores. Starbucks has enjoyed over a 100 percent stock price increase from January 2013 to the summer 2015 and a new income increase of 50 percent from fiscal year end 2012 to fiscal year end 2014.

Future

Krispy Kreme Doughnuts is slowly shifting its focus from wholesale to more of a retail presence. Currently around 50 percent of revenues are derived from each source. However, KKD has always prided itself on hot fresh doughnuts that customers purchase directly from factory stores. As a result, the firm is building smaller-sized factory stores to better serve the retail customer directly. The company is also expanding its footprint internationally. In December 2014, KKD opened its 100th store in South Korea, a 3,200-square-foot doughnut theater facility with the full viewing area and the famous “Hot Doughnuts Now” sign. Also, in early 2015, KKD agreed with Doughnuts Café to establish 15 Krispy Kreme facilities in the greater Saint Petersburg, Russia, area by 2020.

As KKD has expanded and become a global brand, rival firms and other food-producing companies are eyeing the possibility of acquiring the company. In early 2015, Jollibee Foods Corp., based in the Philippines, was considered by many analysts to be a serious contender to purchase KKD, as Jollibee management looks to add an American-based food company to its portfolio. Between growing both domestically and internationally, moving into a more retail-focused strategy, hedging off potential takeovers, and a growing awareness of a healthy eating public, KKD needs a clear strategic plan. Devise a three-year plan for CEO Morgan moving forward.

Marriott International, Inc., 2015

www.marriott.com , MAR

Marriott International is the largest hotel company in the world with more than 4,100 properties in over 80 countries and territories around the world, over 700,000 rooms, and an additional 200,000 rooms in the development pipeline. In June 2014, Marriott opened its 4,000th hotel, the Marriott Marquis in Washington, DC, and opened its 4,200th property in the summer of 2015. The majority of rooms and properties are franchised out, with 2,673 franchised properties containing a total of 360,451 rooms. About 1,057 Marriott properties with 283,029 rooms are company-owned with long-term management agreements. In total, about 97 percent of all Marriott rooms are either managed or franchised, as the company is opposed to owning the rooms outright.

The firm’s flagship brand is Marriott Hotels, designed to serve business and leisure travelers as well as meeting groups. Courtyard is another popular Marriott-owned property designed around transient business travelers. Courtyard hotels are smaller, often with 90 to 150 rooms, and upper moderately priced. Fairfield Inn & Suites are also designed for business travelers, but are priced below Courtyard. Marriott’s Residents Inn is designed for extended stay customers. Marriott’s Ritz Carlton hotels offer luxury accommodations.

Beginning in 2016 at many Marriott hotels you can unlock your room door with your phone, log into your Netflix account from your room television, and charge your wireless mobile device. Marriott’s Q1 2015 earnings were $207 million, up from $197 million the prior quarter, while company revenues dropped slightly to $3.513 billion from $3.559 billion the previous quarter.

History

Marriott traces its roots to an A&W root beer stand founded by Willard Marriott and his wife Alice in 1927 in Washington, DC. The following year, the Marriotts added hot food items to their menu and the new business name became Hot Shoppes. By 1957, the business had grown large enough to become a public offering selling out of stock within 2 hours at the opening price of $10.25 per share. Using capital from the sale of stock, Marriott opened its first hotel the same year in Arlington, Virginia, with 325 rooms. The firm experienced growth in the domestic market and international market over the next two decades, even opening an additional fast-food restaurant and forming a partnership with Sun Line cruise ships.

In 1983, Marriott introduced its Courtyard properties designed for business travelers. In 1987, Marriott introduced Fairfield Inn and acquired Residence Inn and Renaissance Hotel properties. Marriott is noted for including copies of the Book of Mormon in addition to the Holy Bible in its rooms. U.S. Republican Presidential candidate Mitt Romney, a Mormon, recently reported $260,390 in director’s fees from Marriott. Guinness World Records recently recognized the 5-Star JW Marriott Marquis Hotel Dubai as the world’s tallest hotel. In 2013, Marriott International introduced Vacations by Marriott, the company’s official travel deal website.

In 2014, Marriott began a new initiative titled “The Envelope Please” whereby its hotels leave an envelope in every room for customers to tip the housekeeper who cleans their room. Since cleaning is oftentimes performed by women working for minimum wages, tipping these individuals is a way to show your appreciation for their services. Marriott now places envelopes in 160,000 hotel rooms in the United States and Canada, urging its customers to tip the housekeepers. Roughly 750 to 1,000 hotels take part in the envelope campaign from Marriott brands such as Courtyard, Residence Inn, J. W. Marriott, Ritz-Carlton, and Renaissance hotels.

Mission, Vision, Values

Marriott does not report a vision or mission statement. However, the firm does state its core values and the founder’s philosophy. Marriott’s philosophy is to “Take care of associates and they will take care of the customers.” Marriott’s values are as follows:

1. We put people first.

2. We pursue excellence.

3. We embrace change.

4. We act with integrity.

5. We serve our world.

Internal Issues

Exhibit 1 Organizational Structure

As illustrated in  Exhibit 1 , Marriott operates from a divisional-by-region organizational chart. Notice the firm has numerous female executives, consistent with its exemplary record on workplace equality.

Exhibit 1

Marriott’s Executives and Structure

Source: Based on author’s judgment as to reporting relationships.

Figure 1 Full Alternative Text

New Policy

On January 1, 2015, Marriott, and rival Hilton Worldwide, implemented a new policy that requires customers to notify them the day before their scheduled arrival to avoid having to pay for the room. This policy reverses a long tradition of allowing customers to cancel their reservation “up to 6 pm the day of arrival without penalty.” Bob Gilbert, CEO of the Hospitality Sales and Marketing Association International, a hotel industry group, said of the Marriott move: “It’s not surprising. The hotel business is one of the last places where you can hold inventory with no commitment.” Hotel demand in 2014–2015 has exceeded supply in many cities, giving hoteliers the upper hand. Another motivation for the new policy is hoteliers’ desire to stifle the use of apps such as Yapta or HotelTonight that track hotel prices and, whenever a rate dips, apparently a growing number of travelers rebook at a lower rate and cancel the costlier reservation, literally right up until check-in time. Penny-pinching travelers are increasingly using such tools, and Marriott seeks to deter this practice. Big most rival hotels are staying the course with traveler-friendly cancellation policies.

Segment Information

Marriot provides detailed financial breakdowns based on hotel type and location, with three reporting business segments: North American Full-Service, North American Limited-Service, and International.

1. North American Full-Service includes Ritz-Carlton, EDITION, Marriott Hotels, J. W. Marriott, Renaissance Hotels, Gaylord Hotels, and Autograph Collection Hotels.

2. North American Limited-Service includes AC Hotels by Marriott, Courtyard, Fairfield Inn & Suites, SpringHill Suites, Residence Inn, and TownePlace Suites.

3. International includes Ritz-Carlton, Bulgari Hotels & Resorts, EDITION, Marriott Hotels, J. W. Marriott, Renaissance Hotels, Autograph Collection, Courtyard, AC Hotels by Marriott, Fairfield Inn & Suites, Residence Inn, and Marriott Executive Apartments located outside the United States and Canada.

Revenue and net income information for Marriott’s various brands and businesses is provided in  Exhibits 2  and  3 . Note, the North American Full-Service segment has twice the revenue of the Limited-Service segment, yet the Limited-Service segment net income was slightly more in both 2012 and 2014.

Exhibit 2

Marriott’s Revenue Data by Segments (in millions of USD)

Exhibit 3

Marriott’s Net Income Data by Segments (in millions of USD)

Exhibit 4  reveals Marriott’s hotel ownership type by percent of total properties. Note the majority of Marriott’s properties are franchised.

Exhibit 4

Marriott’s Properties by Ownership Type

Source: Based on company documents.

Figure 4 Full Alternative Text

Notable brands by property type are provided in  Exhibit 5 . Note Courtyard is the most common hotel by number of properties followed by Fairfield.

Exhibit 5

Marriott’s Top Brand Hotels in 2014

Courtyard	988
Fairfield Inn & Suites	721
Residence Inn	675
Marriott Hotels	499
Ritz-Carlton	131
All Others	1,079
Total	4,093

Marriott’s properties and rooms by geographic region are reported in  Exhibit 6 .

Exhibit 6

Marriott’s Properties by Geographic Region

Finance

RevPAR is “Revenue Per Available Room = Average price of room × occupancy rate × number of rooms available.” In 2014, Marriott reported worldwide a RevPAR increase of 6.6 percent with a worldwide average daily price of $150.23. For 2014, Marriott reported net income of $753 million, up from $198 million in 2011. Luxury demand worldwide continues to be the strongest segment, and leisure destinations in the United States also experienced strong demand. Marriott reported that Eastern Europe, Russia, and the United Kingdom had strong demand for Marriott properties, but Western Europe only experienced moderate RevPAR growth. The company reported stronger RevPAR growth in the United Arab Emirates, Thailand, and Indonesia in 2014. Marriott’s properties in China, Egypt, and other regions in Asia Pacific reported numbers average to below average on RevPAR.

Marriott’s recent income statements and balance sheets are provided in  Exhibits 7  and  8, respectively.

Exhibit 7

Marriott’s Income Statement (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Revenues	$13,796	$12,784
Cost of revenue	11,830	11,020
Operating expenses	807	776
Other income	44	29
EBIT	1,203	1,017
Interest and others	115	120
EBT	1,088	897
Tax	335	271
Net income	753	626

Source: Based on Marriott’s 2015 Annual Report, p. 53, and Yahoo Finance.

Table 7 Full Alternative Text

Exhibit 8

Marriott’s Balance Sheet (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Assets
Cash and equivalents	$104	$126
Accounts receivable	1,100	1,081
Inventories	—	—
Other current assets	484	346
Assets held for sale	233	350
Total current assets	1,921	1,903
Property, plant, & equipment	1,460	1,543
Goodwill	894	874
Intangible assets	1,351	1,131
Other assets	1,239	1,343
Total assets	6,865	6,794
Liabilities
Short-term debt	324	6
Accounts payable	605	557
Other current liabilities	2,131	2,112
Total current liabilities	3,060	2,675
Long-term debt	3,457	3,147
Other liabilities	2,548	2,387
Total liabilities	9,065	8,209
Common stock	5	5
Retained earnings	4,286	3,837
Treasury stock	(9,223)	(7,929)
Paid in capital and other	2,732	2,672
Total equity	(2,200)	(1,415)
Total liabilities & equity	6,865	6,794

Strategy

Marriott plans to add over 5,000 hotels worldwide to its portfolio by the year 2017 with a focus on overseas markets, in particular Asia, where Marriott plans to double its exposure by 2017. The Middle East and Africa are also key areas of growth. With the recent acquisition of Protea in South Africa, Marriott expects to have a compounded growth rate of 25 percent from 2013 to 2017 in this region and also a 25 percent compounded growth rate in the Middle East over the same time frame.

At year-end 2014, Marriott had 46 properties in the Middle East and in northern Africa, and 104 properties in Sub-Sahara Africa, but announced in January 2014 that the firm was adding 116 hotels in seven different Sub-Sahara African nations. The total deal was worth $187 million. Africa is a strategic focus for Marriott moving forward, citing the continent’s growing middle class and higher growth rates than the United States. Africa tourism grew 6 percent in 2013 and is expected to continue at this rate over the long term. The acquisition of Protea Hospitality Group makes Marriott the largest hotel company in Africa. However, the Ebola virus outbreak in western Africa is a primary concern for Marriott.

Marriott is the largest hotel operator in Beijing and Shanghai, but not in China as a whole. The company plans to open a new hotel in China every few weeks for the next several years. Marriott is more focused on the luxury market in China, but has plans to get into the more middle-class market as this demographic in China grows.

External Issues

Technology

Hotels are rapidly developing smartphone apps to help speed up check-in for travelers, including letting customers go straight to their rooms by using their smartphone to unlock doors. In November 2014, Starwood Hotels and Resorts (HOT) became the first hotel to let guests unlock doors with their phones. The feature is available at 140 Aloft, Element, and W hotels at mid-2015. “Guests want this because it makes their lives simpler,” says Mark Vondrasek, who oversees the loyalty program and digital initiatives for Starwood. “The ability to go right to your room gives them back time.”

In 2013, Marriott International (MAR) launched its check-in app at 330 North American hotels last year. By the end of 2014, that Marriott app was live at all 4,000 of its hotels worldwide. When a room becomes available, a message is sent to the guest’s phone. Traditional room keys are preprogrammed and waiting at the front desk. A special express line allows guests to bypass crowds, flash their IDs, and get keys. Marriott guests made $1.25 billion in bookings in 2013 through its mobile app, according to George Corbin, senior vice president of digital for the company. However, Marriott is holding off on using smartphones as keys until security issues can be resolved.

With brands Hilton, Waldorf Astoria, Conrad, and Canopy, Hilton Worldwide (H) is the second hotel chain, behind Starwood, to announce plans for mobile room keys, which it plans to roll out at the end of 2015 at some U.S. properties. Guests can use also use maps on the Hilton app to select a specific room.

Guests who like personal check-in attention, such as to ask about pool hours, restaurant hours, and so on, can still opt for the traditional check-in. Hotel companies say new technologies are not about cutting jobs. Many hotel chains desire travelers to eventually be comfortable using their mobile apps to interact, such as using an iPad, phone, or smartwatch to request a wakeup call or purchase suite upgrades, spa treatments, and room service. InterContinental Hotels Group (IGH) is testing express check-in at 60 hotels.

The top 15 hotel companies have more than 42,000 properties worldwide with a combined 5.2 million rooms, according to travel research firms STR and STR Global. Thus, some hotels have made smart app technology updates over the past few years, but they remain the minority. One reason for reluctance is security. Starwood, for example, requires the phone to actually touch a pad on the outside of the door to open it. This is to assure the guests that if there is knock on the door late at night and guests go to the peephole to see who is there, their phones in their pockets will not accidently unlock the door.

Industry Fragmentation

The overall hotel industry is quite fragmented with only around 51 percent of the total hotel market being derived from the major brand’s properties. The top five hotel brand companies in the world account for only 41 percent of all branded hotels, leaving many other brands (and “mom-and-pop” hotels) divided among the remaining 59 percent of the branded hotel market. However, the future outlook appears much more positive for branded hotel companies in general, as 72 percent of hotels currently being developed belong to major hotel companies. Hotel industry fragmentation is even much more pronounced in markets outside the United States. For example, in the United States about 70 percent of all hotel rooms available are branded, leaving only 30 percent to independent operators. However, in regions such as China and India, branded penetration can be as low as 20 percent of the total rooms available. Analysts expect a great increase in branded penetration in developing markets such as China and India moving forward, as customers become more affluent, have increased disposable income, and are able to travel more. Many consumers prefer particular brands being assured generally of better security and consistency from one hotel to another of the same brand.

The overall hotel industry is also expected to see modest gains moving toward 2018, enhanced by limited (but positive) supply growth, an improving economy, higher room rates, and a willingness for both businesses and individuals to travel. A key area of revenue growth for hotels is add-on fees, much like airlines charge. Hotel fees have doubled in the last 10 years with luxury hotels often charging the lion’s share of the industry’s total fees. Internet and mini-bars have historically been prone to fees, but in addition now, business centers, in-room safes, and even mandatory valet parking are being added at some hotels to help improve the bottom line.

Different Business Models

Different firms in the hotel industry operate under some combination of four general business models that are (1) owned, (2) leased, (3) managed model, or (4) franchised. Hilton even structures its operations under the four models, whereas Marriott structures are based more on geographic region. Most all hotel firms provide segment data for both ownership type and geographic region breakdowns. Owned hotels are majority or even 100 percent owned by the parent company. Under the leased model, common in large cities, the major hotel brand leases space but otherwise has total control over hotel operations. The managed model consists of a third-party manager operating the hotel on the parent company’s behalf. In return, the branded hotel pays the manager fees, usually based on some combination of revenues and profits. Finally, a franchised hotel is owned and operated by an individual or group of individuals who benefit from the brand name of the company, yet have the luxury of owning and operating their own business. The individuals who run the hotel are required to pay franchise fees and usually a percentage of sales to the major brand company. Hotel brands enjoy franchising to third parties, as this drastically reduces initial capital. However, reduced risks in initial capital can be offset by loss of quality control in franchised properties.

Industry Growth Globally

The hotel industry as a whole enjoyed 4.4 percent overall RevPAR growth in 2013, but growth rates varied greatly between different regions and price points. The top-grossing region was the Americas, with RevPAR growing 6.6 percent attributed mostly to hotels being able to charge higher prices. Higher-end segments also enjoyed much better RevPAR numbers than middle- or lower-tier hotel properties.

Growth in the Eurozone lagged many other global regions with industrywide RevPAR of only 3.2 percent in 2013 with hotel rooms available increasing only 0.9 percent. RevPAR in the InterContinental home market of the U.K. increased 3.9 percent. Germany was a laggard in Europe, only reporting an increase in RevPAR of 1.7 percent.

Asia, Middle East, and Africa (AMEA) enjoyed an overall RevPAR of 6.1 percent. This region does not have the number of developed hotels as other regions; therefore, the numbers are a bit misleading because it is easier to achieve a higher percent gain when working off an initial revenue base much less than that of Europe and the United States. The 6.1 percent increase in RevPAR was buoyed by a 5 percent growth in the average daily rate charged and an increase in total hotel rooms of 2.6 percent. The Middle East and South East Asia enjoyed the largest percent gains of RevPAR at 11.4 and 7.9 percent, respectively. The Middle East numbers are especially impressive considering the ongoing civil unrest the region has experienced recently. Hotel rooms available increased by 4.6 percent in India in 2013, but demand did not rise as fast, resulting in a decrease of RevPAR of 3.3 percent.

The hotel industry in China experienced a similar pattern as India in 2013, with an increase in available hotel rooms of 4.6 percent resulting in prices dropping 3.1 percent and total RevPAR falling 4.2 percent. Analysts blame not only the increase in available rooms but also the slowest growth in China this millennium at only 7.7 percent GDP in 2013. With a large population, a growing middle-class population, and China’s growing tourism, the long-term outlook remains positive for China’s hotel industry.

Competitors

Many thousands of hotel/motels compete for travelers’ dollars. Some major rival firms to Marriott are InterContinental, Wyndham Worldwide, Hilton Hotels, Accor S.A., Best Western, Choice Hotels, and Starwood Hotels & Resorts.  Exhibit 9  provides a comparison of Marriott and two other competitors, and  Exhibit 10  provides additional data regarding some competitors.

Exhibit 9

Marriott versus Rival Firms

	Marriott	Hilton	Starwood
# Fulltime Employees	123,000	152,000	180,000
$ Net Income	$753 M	$673	$633 M
$ Revenue	$13,795 M	$10,502 M	$5,983 M
$ Revenue/Employee	$112,000	$69,000	$33,200
$ EPS Ratio	$2.35	$0.56	$3.41
Market Cap.	$23.5 B	$27.9 B	$13.86 B

Exhibit 10

Marriott and Rival Firms Number of Properties and Rooms

Parent Firm	Major Brands	Number of Properties	Number of Rooms
InterContinental	InterContinental, Holiday Inn, Crowne Plaza	4,700	687,000
Marriott International	Marriott, Courtyard Residence Inn, Fairfield Inn, Renaissance	3,900	360,450
Wyndham Worldwide	Days Inn, Ramada, Super 8, Travelodge	7,350	627,000
Hilton Hotels	Hilton, DoubleTree, Embassy Suites, Hampton Inn, Waldorf Astoria and Conrad	4,000	678,000
Starwood Hotels & Resorts	Sheraton, Westin	1,200	350,000

Source: Based on information at S&P Survey 2014.

Table 10 Full Alternative Text

Note in  Exhibit 9  that Marriott leads both Hilton and Starwood on both total revenues and net income. Starwood has a significantly higher earnings-per-share (EPS) ratio but trails both rivals on market capitalization.

Hotel occupancy rates vary by location. Hotels located in urban areas and airports tend to have higher occupancy rates than other areas, such as resorts and suburban and highway properties. These properties benefit from both tourism and business travel.  Exhibit 11  provides the 2013 occupancy rates for hotels in the United States based on quality of hotel property. Note that higher-end hotels, at least in the United States, enjoyed higher occupancy rates in 2013, with the most luxurious hotels (average rate over $200) enjoying the highest occupancy rates of all. The overall trend toward higher-end hotels and occupancy rates was similar in international markets as well. Generally, top tier, middle tier, and bottom tier are considered to be hotels with prices over $120, $85, and below $60, respectively.

Exhibit 11

USA Hotel Occupancy Rates in 2013 by Property Type

Hilton Worldwide Holdings (HLT)

Headquartered in McLean, Virginia, Hilton is a large worldwide hotel chain with 10 brand names and properties in 91 countries. Hilton operates and/or franchises 4,000 hotels and timeshares with over 678,000 rooms and around 40 million customers in its rewards program; it employs over 150,000. Hilton’s vision is “to fill the earth with the light and warmth of hospitality” and its mission is “To be the preeminent global hospitality company—the first choice of guests, team members, and owners alike.” Notable properties Hilton operates include Waldorf Astoria and Conrad in the luxury segment, Hilton, Double Tree, and Embassy Suites in the Full-Service line, and Hilton Garden Inn, Hampton, Homewood Suites, and Home 2 in the Focused-Service segment.

Hilton’s three primary business segments for Hilton are (1) ownership, (2) management and franchise, and (3) timeshare. Year-end financial results were $4,075 million with EBIT of $926 million, $1,271 million with EBIT of $1,271 million, and $1,109 million with EBIT of 297 million for each of the three segments, respectively. Hilton reported overall net income of $415 million in 2013, up from $253 million just two years earlier. However, Hilton reported net income of $673 million in 2014, up 62 percent from 2013, while revenues increased 8 percent to $10,502 million.

InterContinental Hotels Group plc (IHG)

Headquartered in Denham, United Kingdom, InterContinental is world famous for its InterContinental flagship branded hotel. The company’s brands include Hotel Indigo, Crowne Plaza, Holiday Inn, Holiday Inn Express, EVEN, and several others. The firm’s rewards program is considerably larger than that of rival Hilton, with over 77 million members worldwide. The company owns, leases, or franchises over 4,700 hotels with over 687,000 rooms in 100 different nations around the world. In 2013, InterContinental opened an additional 237 properties and signed contracts to put 444 more in the pipeline. Key markets moving forward for InterContinental are the United States, the Middle East, Germany, the U.K., Canada, Greater China, India, Russia, Mexico, and Indonesia. Intercontinental reports earnings based on geographic region and broken down further by company-owned versus franchised-owned by each geographic segment.

Starwood Hotels and Resorts Worldwide (HOT)

Starwood operates luxury hotels, full-service hotels, resorts, select-service hotels, and extended-stay hotels under a variety of brand names, but the company primarily focuses on upper-end hotel offerings. Branded hotels by Starwood include the W, Westin, Le Meridien, Sheraton, Four Points, Aloft, and Element. Starwood is expanding its footprint with both management and franchise contracts; it doubled its international footprint between 2008 and 2013. As of March 2014, the hotel owned and operated 1,200 properties and 350,000 total rooms in 100 different countries. Headquartered in Stamford, Connecticut, Starwood reported net income of $635 million in 2013. Starwood is building the first-ever Aloft brand hotel to enter Australia by 2016 and will expand its Latin American presence by 20 percent by 2016 with the opening of 17 new hotels in that region. Starwood’s 2013 same-store RevPAR increased 5 percent and the company opened 74 new hotels totaling 16,200 rooms and signed 152 new deals for hotels—the most since 2007. Starwood at year-end 2013 had 590, 158, 133, and 130 properties in North America, Europe, Asia, and China, respectively. The firm reported revenues and net income of $5,983 and $633 million in 2014, respectively.

Future

Marriott and the entire travel industry have experienced a growth in sales as the economy in the United States has improved and oil prices have fallen. The firm in 2015 announced plans to buy back 25 million shares or around 9 percent of total shares outstanding. Marriott also announced in January 2015 that it plans to buy Canadian-based Delta Hotels and Resorts for $125 million. The acquisition of Delta Hotels is in line with Marriott’s plans to expand internationally; however, the firm is mostly focused on emerging markets. In 2015, CEO Sorenson reiterated these plans in particular to India, where the firm currently operates 24 hotels with plans to operate 50 by 2020. Currently, Marriott has 40 hotels in the long-term pipeline for India; however, infrastructure issues continue to hamper expansion into India as rapidly as Marriott and other rivals would like. In addition to India, Marriott has 150 properties in Asia (not including China or India), with more than 200 in the pipeline. Chinese properties currently total 70, with more than 80 additional hotels scheduled to be operating by 2020. Marriott is opening a hotel every two weeks in China, and plans to increase the number of its properties in the Middle East and Africa by 75 percent and Latin America by 50 percent through 2020.

Currently many emerging markets are struggling and the strong dollar hurts overseas sales that are converted back to dollars. There are also many regions of the world in which Marriott and rivals would like to position their properties. Help CEO Sorenson develop a three-year strategic plan moving forward that most effectively uses Marriott’s resources.

Wynn Resorts Limited, 2015

www.wynnresorts.com , WYNN

Headquartered in Paradise, Nevada, Wynn Resorts is a large upscale casino with properties in Las Vegas and Macau. Wynn’s properties offer many high-end gaming options and world-class entertainment through shows, shopping, spas, dining, and more. Wynn’s Las Vegas properties include Wynn and Encore, which offer nightclubs, a beach club, Ferrari and Maserati dealerships, and even a golf course. Wynn Resorts has 4,748 hotel rooms in Las Vegas and 1,008 rooms in Macau. Wynn Macau (located on an island just off the coast of Hong Kong) has an agreement with the Chinese government to use 51 acres of land in the Cotai area of Macau to build an exclusive $4 billion resort. Wynn expects the project to be completed in the first half of 2016. The company owns 72 percent of its Chinese operations and employs 16,500. However, gambling revenue in Macau fell 2.6 percent in 2014 to 351.5 billion patacas ($44 billion USD), the first decline in Macau since 2002. December 2014 gambling revenues in Macau dropped a record 30 percent from a year earlier to 23.29 billion patacas. Wynn generates much of its revenue from premium customers who gamble on credit. Its lax credit policy leaves the firm at a higher credit risk than rival firms. All Macau companies are struggling, primarily due to a crackdown on corruption in China and that country’s tighter visa policies, which undermined gambling in Macau.

History

Wynn Resorts traces its history back to 2002 when Mr. Steve Wynn and Japanese billionaire Kazuo Okada agreed to terms on the Wynn Resort property in Las Vegas. The two purchased the Desert Inn for $270 million and had its IPO the same year, a full three years before the Wynn opened its doors for business. Three other properties followed with Wynn Macau, Encore in Las Vegas, and the Encore in Macau opening their doors in 2006, 2009, and 2010, respectively. The Wynn Macau property’s construction began over a year before the Wynn Las Vegas opened for business. In September 2014, the Massachusetts Gaming Commission voted to approve Wynn Resorts’ proposed $1.6 billion casino to be located in Everett, Massachusetts, just north of Boston.

For Q3 of 2014, Wynn’s revenues from its Las Vegas operations increased 9 percent year-over-year to $427.8 million, due to higher casino and room revenues. Casino revenues increased 10.5 percent from the prior-year period, while room revenues were up 7.2 percent to $102.5 million. Wynn reports its Macau table games results under two categories: the VIP segment and the mass market segment. For Q3 of 2014, Wynn Macau’s revenues declined 5.6 percent year-over-year to $942.3 million, owing to a decline in revenues generated from the VIP market. Wynn’s overall Q3 2014 results were good, so the company increased its quarterly dividend by 20 percent, and approved an additional cash dividend of $1.00 per share.

Internal Issues

Wynn’s organizational structure is found in  Exhibit 1 . The company has two primary reporting segments: Las Vegas and Macau. There is substantial duplication of titles in the firm’s structure, including two different executives with the title president of Wynn Macau. Top management is well compensated, with Steven Wynn’s reported annual salary being $19 million, and the top 6 other executives’ salary plus options ranging between $5 and $9 million.

Exhibit 1

Wynn Resorts’ Organizational Structure

Vision/Mission

The authors could not find either a vision or mission statement for Wynn Resorts.

Strategy

CEO Steve Wynn has excellent expertise in developing and operating high-quality casino properties. Wynn employees are thoroughly trained to provide guests with the luxury service they expect. An extensive reward system also attracts and keeps guests returning. The company is actively looking to build or acquire properties in new markets. In 2013, the firm won a bidding competition for the rights to build a $1.6 billion casino near Boston, Massachusetts, set to open in 2017. Wynn won that bid by a 3-1 vote over the Mohegan Sun. Regulators cited better-paying jobs, and Wynn’s plans to clean up an industrial land development site nearby, as reasons for awarding Wynn the contract. Interestingly, as the $2 billion, new, oceanfront Revel casino in Atlantic City, New Jersey, was auctioned off in 2014 for roughly $200 million, Steve Wynn stood on the sidelines, apparently having no confidence in the future of Atlantic City as a gaming destination. But in general, Wynn is looking to expand geographically.

Segment Data

Wynn operates in two business segments—Macau and Las Vegas—as revealed in  Exhibits 2 and  3 . Note that Wynn derives about three times more revenue from Macau than Las Vegas. Wynn has a 20-year lease agreement with the Macau government that runs through 2022. Currently there are two Wynn properties in Macau with a third to be completed in 2016. The properties include eight restaurants, a full array of shops, spa, poker pit, high-end private gambling salons, as well as table games and slots.  Exhibit 3  reveals that Wynn’s Macau properties have double the table games of the two Las Vegas properties, but far fewer slots. Macau properties account for about 17 percent of total rooms, yet Macau accounted for 61 percent of revenues in 2013, reflecting a higher end customer on average visiting the Macau properties.

Exhibit 2 

Wynn’s 2014 Operating Income by Location

As  Exhibit 3  reveals, Las Vegas properties focus more on slot than Macau properties to generate revenues. Las Vegas based properties, Wynn and Encore, have a total of 3 night clubs, 34 restaurants, a beach club, 18-hole golf course, 96,000 square feet of high-end shops, and a Ferrari and Maserati dealership. Not revealed in  Exhibit 3  are the data from 2013, but it is important to note that the average number of Macau slot machines declined 21 percent from 866 to 679. Note in  Exhibit 4  that about 79 percent of all Wynn revenues are derived from gaming rather than rooms and entertainment.

Exhibit 3 Wynn’s Breakdown of Casino Properties

	Average Number of Table Games	Average Number of Slots
Macau	461	679
Las Vegas	232	1,858

Finance

Wynn Resorts is engaged in developing the Wynn Palace Project on the Cotai land in Macau. The opening of this new casino was scheduled ahead of the Chinese New Year in February 2016, however, it has been reportedly postponed owing to a delay in timing of permits and will open sometime later in the first half of 2016. Currently, the company expects the project to cost around $4.1 billion. The company spent around $428.7 million on the Cotai project in the quarter.

Exhibit 4 Product Revenues (in millions of USD)

	2014	2013	2012
Casino	$4,274	$4,490	$4,035
Rooms	543	492	480
Entertainment and retail	401	419	417
Food and beverage	605	587	588
(Promotional allowances)	(369)	(367)	(366)
Total revenues	5,434	5,621	5,154

Source: Based on information from Wynn press release, 2015.

For Q4 of 2014, Wynn Resorts’ revenues from Las Vegas operations declined 5.8 percent year over year to $376.8 million due to a decline in casino revenues. Net casino revenues fell 15.5 percent from the prior-year period to $171.0 million. Table games win percentage was 24 percent. However, room revenues were up 6.3 percent to $95.5 million, due to improved average daily rate and occupancy rate. During Q4 2014, RevPAR was up 7.2 percent.

For all of 2014, Wynn’s earnings per share were $7.58, down 0.8 percent year over year. Revenues were $5.43 billion, down 3.3 percent year over year. Wynn’s recent income statement is provided in  Exhibit 5 , and the company’s balance sheet is provided in  Exhibit 6 .

Exhibit 5 Wynn’s Income Statement (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Revenues	$5,433	$5,620
Operating expenses	4,159	4,334
EBIT	1,274	1,286
Interest	315	299
EBT	959	987
Tax	4	18
Other items	(223)	(240)
Net income	732	729

Competitors

Wynn competes with Caesars Entertainment and MGM Resorts in Las Vegas, and competes with Las Vegas Sands in both Las Vegas and Macau. Caesars and MGM have hotels around the United States and are larger than Wynn, based on total U.S. revenues. Growth expected in the U.S. gaming industry is projected to be close to 2 percent from 2015 to 2019, a slight increase from the 1.5 percent growth rate from 2010 to 2014. Competition is fierce, however—not only between rival firms but also between local and state governments, and with online gaming companies. In 2014 alone, 4 casinos shut down in Atlantic City, partly blamed for new casinos opening in neighboring Philadelphia, Baltimore, and West Virginia, drastically reducing the number of persons driving to Atlantic City to gamble.

Especially in areas with many casinos, like Las Vegas or Atlantic City, casino companies are have to continually update their properties, amenities, and games. New slot machines that are cashless, larger gambling promotions, larger jackpot prizes, and other strategies are being used to attract customers. The casino hotel industry also faces competition from external players such as racetracks and riverboats. Although American citizens can still easily gamble online, the United States has legislated against such operations, though many of these casinos are often based in the Caribbean. Lotteries are also a competitor in the industry.

Exhibit 6 Wynn’s Balance Sheet (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Assets
Cash and equivalents	2,422	$2,609
Accounts receivable	238	242
Inventories	72	75
Other current assets	50	43
Assets held for sale	—	—
Total current assets	2,782	2,969
Property, plant, & equipment	5,856	4,934
Goodwill	—	—
Intangible assets	112	31
Other assets	312	443
Total assets	9,062	8,377
Liabilities Short-term debt	—	$1
Accounts payable	303	273
Taxes	137	211
Other current liabilities	873	970
Total current liabilities	1,313	1,455
Long-term debt	7,345	6,588
Deferred income taxes	25	14
Other liabilities	169	188
Minority interest	239	317
Total liabilities	9,091	8,562
Common stock	1	1
Retained earnings	164	66
Treasury stock	(1,145)	(1,143)
Paid in capital and other	951	891
Total equity	(29)	(185)
Total liabilities & equity	9,062	8,377

Source: Based on Wynn’s 2014 Annual Report, p. 69, and Yahoo Finance.

Exhibit 7  reveals that both Caesars and MGM reported negative net income and have significantly lower market caps than Wynn.

Caesars Entertainment Corporation (CZR)

Headquartered in Las Vegas, Caesars is one of the largest casino companies in the world with brand names including Harrah’s, Caesars, Bally’s, Rio, and Horseshoe. The firm employs 70,000 worldwide, with notable properties in Las Vegas, Atlantic City, New Orleans, Mississippi, several other states, and the London Clubs International family of casinos. The company operates in three main geographic segments: (1) Las Vegas, accounting for 40 percent of domestic revenues, (2) Atlantic City, and (3) an “Other,” focusing on properties in states mostly bordering the Mississippi River.

Caesars also manages several Native American casinos. In total, Caesars controls about 13 percent of the total U.S. market share and reported worldwide revenues in Q3 of 2014 to be $1.395 billion, up 0.3 percent from the prior year-over-year period. However, the company’s net income for that Q3 was negative $908 million, compared to a negative $761 million the prior year-over-year period. Caesars is having to spend excessively to modernize outdated Las Vegas properties. As of October 2014, Caesars and its lenders were negotiating terms to provide a path for Caesars to de-leverage and more effectively pay off its debt.

Exhibit 7 A Comparative Analysis of Wynn versus Rival Firms

	Wynn	Las Vegas Sands	Caesars	MGM
# Employees	16,800	48,500	68,000	50,000
$ Net Income	732 M	2,306 M	(2,948 M)	(156 M)
$ Revenue	5,433 M	13,770 M	8,560 M	9,809 M
$ Revenue/Employee	323,000	284,000	125,882	196,180
$ EPS Ratio	7.18	3.52	(25)	0.30
$ Market Cap.	16 B	48 B	1.5 B	10.6 B

Source: Based on various company reports.

MGM Resorts International (MGM)

MGM is one of the largest hotel casino corporations in the world, with an 11 percent market share in the United States. Originally named MGM Mirage, the firm changed its name to MGM Resorts International in 2010 to better reflect its strategy of international expansion. MGM primarily still operates in Las Vegas, but also has properties along the Mississippi Gulf Coast, in Detroit, and in Macau. Unlike Caesars, which has recently been remodeling many of its properties, MGM is known for continually investing in properties to keep them up-to-date. The firm earns around 43 percent of sales from gaming activities and 57 percent from hotels, food, and entertainment. In late 2014, MGM was allowed to reclaim its 50 percent stake in the Atlantic City-based Borgata, after its share was held in a trust since 2010 awaiting a potential buyer. To diversify its assets, MGM recently purchased a $400 million stake for a 55 percent share in Mark Burnett’s Ventures. Mr. Burnett has produced such television shows as Survivor, The Bible, Shark Tank, and The Apprentice, among others.

Las Vegas Sands (LVS)

The Las Vegas Sands accounts for about 4 percent of the hotel casino industry in the United States and has an overall profile most similar to the Wynn than any other casino corporations. Top properties of the Sands include The Venetian, The Palazzo, and The Sands casinos in Las Vegas. Total Vegas properties include 7,100 rooms and over 225,000 square feet of gaming space. In Macau, the Las Vegas Sands operates the Sands Macau, the Venetian Macau, and the Four Seasons Macau. The Sands reported 2013 revenues of $13.8 billion, up 45 percent from two years prior.

Interestingly, the Las Vegas Sands was in discussion with the government in Spain to build a “EuroVegas” project for $30 billion in Madrid, but it was cancelled in December 2013 due to disagreements between the Spanish government and the Sands. The Sands also recently paid $47 million to the U.S. government to settle a money-laundering case. Even though the settlement is not large in relation to the Sands finances, the settlement has caused the Sands to work diligently to strengthen their compliance globally.

External Issues

Internet Gaming and Poker

Online gambling is currently legal in Nevada, Delaware, New Jersey, and Washington, DC. The industry is expected to generate annual revenues of $10 billion by 2017. The market is primarily focused on 25- to 35-year-old customers. To facilitate entering the market, the top firms, such as MGM and Caesars, have acquired online gaming firms that produce apps for use on phones and tablets. Competitors such as PokerStars, Full Tilt Poker, and Absolute Poker pose a risk to traditional casinos with their online operations. However, in 2011, the United States Federal Government shut the sites down on the basis of fraud. But in 2012, a U.S. judge in New York ruled that Texas Holdem Poker is more of a game of skill than luck, and running Texas Holdem Poker games technically does not violate any U.S. gambling laws. The ruling only legally applies for the judge’s district, but it does serve as a precedent, and could open the door for possibly online gambling returning, or even smaller “mom-and-pop” physical poker locations.

Industry Outlook

About 85 percent of Americans now say gambling is an acceptable activity; this increasing approval rate should help the industry moving forward. Wynn relies on middle-class Americans, but targets upscale clients—more so than any rival firm. Outside the United States, there is fierce competition for high-end customers in Macau, Dubai, and Singapore. With the high-end market in Macau, table games tend to be the largest driver of casino operations, exceeding all other forms of gaming, as well as revenue from food, rooms, and other entertainment provided. The annual growth rates from Asia’s middle-class customers have exceeded U.S. growth rates in each year from 2010 to 2014. However, high-end customers remain a top priority, even in the U.S. market with 30 percent of U.S. industrywide revenue coming from households with $150,000 or more in income. With household incomes between $35,000 to $99,000, middle-class customers comprise about 46 percent of total U.S. casino revenues. High-stakes gamblers comprise about 22 percent of worldwide casino revenues.

The first half of 2014 saw revenues 5 percent below revenues for the same prior period in Macau, but revenues on the Las Vegas strip were up 4 percent from the first half of 2013 to the first half of 2014. A revitalization of the Las Vegas strip may be near, as casinos are updating their offerings and Australian Billionaire James Packer announced a new 34-acre project along the Las Vegas strip to be finished in 2018.

In the United States, slot machines, poker machines, and various other gaming machines account for 55 percent of industrywide revenue, while table games account for 15 percent and accommodations account for 11 percent of industrywide revenues. However, the percentages depend on location. In Iowa and South Dakota, for example, slot revenues can be in excess of 90 percent of casino revenues, because most of these customers are drive-in folks with a limited budget, thereby making slots an attractive choice for their entertainment dollars. The Las Vegas strip now receives over 60 percent of its revenue from nongaming activities such as food, drinks, shopping, and shows. Many customers in Las Vegas visit for reasons other than primarily to gamble. There is also a growing trend among younger customers to favor table games over slots. Younger customers also value nongaming amenities like bars, clubs, shopping, and food. According to the American Gaming Association, about 34 percent of Americans visit casinos annually.

Industrywide Revenue Volatility

The hotel casino industry has relatively stable revenues, regardless of the economy. Caesars, for example, experienced revenue increases of 6 percent between 2011 and 2013, and Wynn Resorts revenues increased 7 percent over the same time period. Overall, the U.S. casino hotel market saw annual revenue increases of only 0.5 percent between 2010 and 2014. Several reasons cited as to why revenues are relatively stable include (1) high-stakes gamblers are not affected by the economy to the same degree as smaller-stakes gamblers, (2) people with a gambling problem are likely to gamble regardless, and (3) many tourists still desire to gamble while on vacation.

Gambling Regulations

The casino industry is a highly regulated industry in the United States as well as internationally. States have jurisdiction in the country to regulate or even prohibit the practice. Currently, the only two states with gambling allowed statewide are Nevada and Louisiana. In total, 17 American states have legally operating casinos, including states with riverboat casinos. Kansas recently opened 4 casinos operated by the Kansas Lottery, and Massachusetts has recently accepted the bid from Wynn Resorts to open a casino near Boston. The high degree of regulation is a burden for firms like Wynn, MGM, and Caesars from expanding into other possible gaming locations such as Myrtle Beach, South Carolina, where casinos are prohibited.

Nevada accounts for about 50 percent of casino hotels in the United States and earns nearly 30 percent of U.S. casino revenues. Las Vegas first opened casinos in the 1930s and enjoyed nearly 50 years of uncontested market space, until Atlantic City’s first casino in 1978. In the last 40 years however, many states have added casinos, including American Indian reservations, putting increased pressure on Las Vegas in addition to large international markets like Dubai, Macau, and Singapore. For example, Pennsylvania now accounts for 8 percent of total U.S. casino revenues, mostly from slot machines, and future projections predict New York and Massachusetts as significant players as casinos are set to soon open in these states. Florida has casinos, as does Mississippi and North Carolina.

Macau Developments

Macau overtook the Las Vegas Strip in 2006 as the world’s largest casino market. Macau gaming revenues increases were 58, 42, 13, and 19 percent from 2010 to 2013, respectively. However, in 2014, Macau revenues declined by 2 percent. The long-term outlook for Macau is positive because of the growing middle class in China, but the slowdown has some industry experts pointing to Las Vegas as a new profit driver. Nevertheless, casino revenues in Macau in 2013 were seven times that of the Las Vegas strip. Part of the slowdown in Macau during 2014 was blamed on a Chinese crackdown on corruption on the mainland, as well as pro-democracy political unrest in Hong Kong. Macau is a one-hour ferry ride from Hong Kong. Also dragging down Macau casinos are tighter visa policies for Chinese people traveling to Macau, increased oversight on UnionPay cards many gamblers use to access funds in Macau, new smoking restrictions, and China’s crackdown on corruption has prompted high-rollers to shy away from Macau.

In 2014, Macau experienced over a 6 percent decline in revenue from the same time period in 2013. Macau has heavily relied on junkets to bring high-rolling customers to Macau from mainland China. The Chinese government limits the amount of money that can leave the mainland, so the junkets serve as an intermediary, arranging to take high-rollers to Macau, loan them credit, and collect on the credit once back in China. Many of the junket organizers are speculated to be associated with organized crime as well, and many casinos—such as Las Vegas Sands and Wynn Resorts—have refused to do business with several junket outfits, and require extensive background checks on others suspected of organized crime.

A new $5 billion bridge linking Hong Kong to Macau will cut travel time from over an hour (and in some cases, 4 hours) to only 40 minutes, saving a 40-mile ferry ride. The bridge should be completed in 2016. Other infrastructure improvements such as rapid transit rails from highly populated areas to Macau, and upgrades to the airport to double its capacity by 2017, should bode well for casino properties in Macau, practically the Cotai Strip area of Macau, which will see a new Wynn property and MGM property open in 2016.

Japan is a potential new gaming industry player in the Asia region moving forward. Ahead of the 2020 Olympics, Japan is aggressively seeking legislation to legalize gambling.

Future

Wynn Resorts concluded its fourth quarter of 2014 with a 32 and 5.8 percent decrease in revenues from fourth quarter 2013 in Macau and Las Vegas, respectively—blamed on a poor economy and a government crackdown on high-end gambling in China. A new smoking ban proposed in 2015 in Macau is also expected to hinder revenues if formally passed. Wynn currently has two main projects in the works: Wynn Palace in Macau with a cost totaling $4.1 billion and expected to open on Cotai in 2016, and the Wynn Project in Massachusetts. Wynn’s Massachusetts project is proceeding forward after the purchase of 33 acres of land in Everett, Massachusetts, along the Mystic River. Falling revenues and intense competition have plagued the industry over the last 3 years. Help CEO Steve Wynn develop a 3-year strategic plan to move his company forward.

Cinemark Holdings, Inc., 2015

www.cinemark.com, CNK

Headquartered in Plano, Texas, Cinemark Holdings is one of the leaders in the movie theater business with over 465 theaters and 5,000 screens in the United States and Latin America (and Taiwan), making it the third-largest in the United States and the largest in Brazil and Argentina. The company operates in two segments—United States and International, with all international business contained within Mexico, Central America, South America, and Taiwan. In total, Cinemark operates 334 theaters in the United States with 4,457 screens in 39 states and 148 theaters, and over 1,106 in 13 Latin American nations, including a presence in 14 of the top 15 South American markets. Cinemark competes with AMC Entertainment and Regal Entertainment in the United States, along with a host of other smaller competitors, in addition to Cable TV, Satellite TV, Netflix, and Hulu. Cinemark had 2014 year-end revenues of $2.6 billion and employs 6,000.

Following an 11 percent decline between 2004 and 2014, the number of movie-going tickets sold in the United States shrank again in 2013, 1.5 percent to $1.34 billion. Box office revenue was down 4 percent in 2014. However, receipts were far better overseas, especially in China, where theaters reported a 27 percent growth in 2013, following a 36 percent growth in 2012. Movie theater companies overall are building, on average, 14 new screens per day in China. In the United States, movie theaters are raising prices, with the average movie ticket price in 2013 increasing to $8.13, up from $7.96 in 2012. 3-D and IMAX movie ticket prices ranged from $10 to $20 each.

An interesting development in summer 2015 for Cinemark, Regal and AMC was all three major players received formal inquiries from the U.S. Department of Justice on antitrust. The principle argument accuses the three large players of signing deals with large film studios to limit the number of theaters showing blockbuster movies. This has the effect of shutting out smaller independent chains from showing blockbusters until well after the movies have been released. As of July 2015, all three firms believe they are not in violation of the U.S. Sherman Act and are in the process of supplying information to the U.S. authorities in hopes of resolving the matter.

History

Founded by Lee Roy Mitchell in 1984 and initially building movie theaters in Texas, Utah, and California, Cinemark was one of the pioneers in the stadium seating design that began in the 1990s. In 2006, Cinemark acquired Century Theaters, which added 80 theaters to its portfolio. In 2009 and 2012, respectively, Cinemark acquired Oakland Park, Florida-based Muvico and Dallas-based Rave Cinemas. The Rave acquisition helped the firm further expand into the New England market with 32 theaters located in 12 states, providing 483 screens.

Cinemark needs “movie going” to be much more of an “experience” than sitting at home watching Netflix or cable television. So, in October 2014, Cinemark filled its theater seats in Texas, Illinois, and Washington, in the middle of the night, by streaming a video game competition, the Riot Games League of Legends Championships, being held in South Korea. Cinemark is also following some rivals, such as Regal Cinemas, which has been adding luxury recliners to as many as 350 theater locations by 2015. AMC’s Dine-in-Theaters now allow patrons at some locations to purchase beer and wine, as well as lunch, dinner, or some snacks, while watching a movie. In June 2014, the first 4D theater in the United States opened in Los Angeles, with artificial wind, fog, scents, and sensor-equipped seats, adding another dimension to 3D films.

Internal Issues

Organizational Structure

Based on the company’s website and most recent Form 10K, Cinemark has no divisions by region and in fact no divisions at all, yet the firm has a COO, as indicated in  Exhibit 1 . Analysts do not consider the Cinemark structure to be effective or efficient.

Exhibit 1

Cinemark Organizational Chart

Vision/Mission

Cinemark does not provide a written vision statement. However the following mission statement was taken from its website:

Cinemark has a unique operating philosophy which combines finding the right markets in which to expand, having high-quality, right-sized theatres, and a strong operating discipline, resulting in strong operating performance. We have grown through organic expansion and selective acquisitions, creating a diverse footprint of high quality theatres in high growth markets with superior demographics.

Strategy

Cinemark currently serves 23 of the top 30 U.S. markets, including San Francisco, Dallas, Atlanta, and Salt Lake City, among others. The company also has a market presence in 14 of the top 15 metro areas in South America, and is the industry leader in Brazil and Argentina. Cinemark has 148 theaters with 1,106 screens in 12 Latin American nations. International sales were 29 percent of total revenues for 2013.

Like rivals AMC and Regal, Cinemark has a clear commitment to building new state-of-the-art theaters, remodeling existing theaters, and/or acquiring new theater rivals in select markets. In 2013 alone, Cinemark opened 709 new state-of-the-art screens worldwide and has plans to open another 263 by 2016. There is a trend in the market to shift from film to digital technology. All U.S. and international auditoriums have digital projection technology, and over 50 percent of screens in both the United States and international segments are 3-D compatible. Cinemark had approximately 150 XD auditoriums in 2013 and 200 in 2014 to lead the industry. XD auditoriums are considered premium in nature, with customer sound and wall-to-wall and ceiling-to-floor screens, surround sound, and plush seating.

The firm opened its first Cinemark Movie Bistro in 2013, offering fresh wraps, burgers, gourmet pizza along with beers, wines, and frozen cocktails. These premium concept theaters charge higher prices, but the company waited until 2014 to raise prices, much like their competitors Regal and AMC did with their more premium theater experiences.

Segment Data

Cinemark’s sales derived from U.S. and Latin American operations in 2013 were 71 and 29 percent, respectively.  Exhibits 2  and 3 reveal the breakdown in U.S. and Latin American locations. Even though 29 percent of revenues were derived from Latin America in 2013, only 20 percent of wide screens are located in this region, revealing the revenue strength generated from these regions.

Exhibit 2

Cinemark’s Revenues by Segment (in millions of USD)

Revenues	2014	2013
	USA	International	USA	International
Admissions	$1,221	$423	$1,231	$475
Concessions	$636	$210	$609	$236
Other	66	71	59	72
Total Revenues	1,922	705	1,900	783

Source: Based on information on 2015 Company News Release of 4th Quarter 2014 data.

Table 2 Full Alternative Text

Note in  Exhibit 2  that Cinemark derived 63 percent of its revenues in 2014 from admissions, but experienced a 3.6 percent decline in total consolidated admissions from 2013. However, international admission revenues declined 11 percent and total revenues from the international division declined 10 percent. Cinemark’s average U.S. ticket price was $7.02 in 2014, up only 7 cents from 2013. Average ticket prices outside the United States in 2014 were $6.23 for Cinemark. Note in  Exhibit 3  that 44 percent of Cinemark’s screens in the United States are in California and Texas. Not revealed in  Exhibit 3 , 2014, total screen allocations in the US did not meaningfully change from 2013. Despite being the largest movie theater firm in Argentina, Cinemark actually has more locations in Colombia, albeit with fewer screens. As indicated by  Exhibit 4 , despite being the largest Brazil alone accounts for 45 percent of all Cinemark screens in Latin America.

Exhibit 3

Cinemark’s USA Screen Percentages

Source: Based on information on page 8 of the Cinemark 2013 Annual Report.

Exhibit 4

Cinemark’s South American Operations

South America	Locations	Screens
Brazil	65	516
Colombia	28	144
Argentina	19	168
All Other Latin America	48	349
Latin America Totals	160	1,177

Finance

Exhibit 5  reveals that Cinemark’s total revenues decreased 2 percent from 2013 to 2014, yet net income rose an impressive 30 percent—mostly explained by a $72 million loss the firm took in 2013 on an early retirement of debt. This number is consolidated into the other income (loss) line in  Exhibit 5 . Cinemark’s $2.7 billion in 2013 revenues includes 32 theaters acquired during that fiscal year. Through its acquisition strategy, however, Cinemark has accumulated over $1.2 billion in goodwill and $356 million in intangibles, exceeding total stockholders’ equity by over $500 million, as revealed in  Exhibit 6 . The firm also has total long-term debt of over $2 billion, or twice the total equity of the firm.

Exhibit 5

Cinemark’s Income Statement (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Revenues	$2,627	$2,683
Operating expenses	2,264	2,268
EBIT	363	415
Interest	73	152
EBT	290	263
Tax	96	113
Income from continuing operations	194	150
Other items	(1)	(2)
Net income	193	148

Source: Based on Cinemark’s 2014 Annual Report Page F-4 and Yahoo Finance

Exhibit 6

Cinemark’s Balance Sheet (in millions of USD)

Report Date	December 31, 2014	December 31, 2013
Assets Cash and equivalents	$639	$599
Accounts receivable	48	81
Inventories	13	14
Other current assets	41	36
Total current assets	741	730
Property, plant, & equipment	1,451	1,427
Goodwill	1,277	1,288
Intangible assets	348	356
Other assets	335	343
Total assets	4,152	4,144
Liabilities
Short-term debt	8	10
Accounts payable	119	93
Other current liabilities	287	293
Total current liabilities	414	396
Long-term debt	1,814	1,823
Deferred income taxes	149	168
Other liabilities	651	655
Total liabilities	3,028	3,042
Common stock	120	119
Retained earnings	224	148
Treasury stock	(62)	(52)
Paid in capital and other	842	887
Total equity	1,124	1,102
Total liabilities & equity	4,152	4,144

Source: Based on Cinemark’s 2014 Annual Report Page F-3 and Yahoo Finance.

As of 2013, 292 Cinemark USA theaters were leased and 42 were company owned. Leases generally are on a long-term basis ranging from 20 to 45 years. Approximately 81 percent of current theaters on lease have terms in excess of 15 years. Leases charge a fixed monthly rent payment with an additional percentage if certain revenue levels are reached. All properties outside the United States are under lease agreements.

Competitors

In December 2014, Redbox raised prices on movies rented at its 40,000 kiosks in the United States, with daily rental rates for DVDs going from $1.20 to $1.50 (up 25 percent) and Blu-ray rentals going from $1.50 to $2 (up 33 percent). In January 2015, Redbox raised prices on its daily video game rentals from $2 to $3 (up 50 percent). Even at $1.50 a day on DVDs, Redbox remains “the best value in new-release home entertainment,” says CEO J. Scott Ki Valerio of parent company Outerwall (OUTR). Redbox (and Cinemark) faces mounting competition from video streamers Netflix and Amazon. Redbox’s Q3 2014 revenue dropped 5 percent to $1.4 billion, and same-store sales fell nearly 12 percent. By the end of 2014, Redbox plans to remove 500 to 700 underperforming kiosks. This was the first time Redbox has raised prices on Blu-ray discs and video games, and only the second time in more than 12 years that the company raised prices on DVDs.

The movie theater industry is dominated by three major companies: AMC Entertainment, Regal Entertainment, and Cinemark. Carmark is also a large competitor, but its strategy is to focus on small- to medium-sized markets.  Exhibit 7  reveals a comparison of Cinemark versus top rival firms. Note AMC’s EPS is significantly higher than those of rival firms. The industry also faces stiff competition from concerts, amusement parks, cable television, home video systems, Netflix, Hulu, and other forms of entertainment.

Exhibit 7

Cinemark versus Rival Firms

	Cinemark	Regal	AMC
# Full-Time Employees	6,253	23,168	900
$ Net Income	193 M	105 M	64 M
$ Revenue	2,627 M	2,990 M	2,695 M
$ Revenue/Employee	420,011	129,000	2,994,444
$ EPS Ratio	1.38	0.68	3.38
$ Market Cap.	4.81 B	3.67 B	3.17 B

Source: Based on company documents.

Regal Entertainment Group (RGC)

The largest motion picture exhibitor company in the United States, Regal Entertainment Group employs 25,000 people and has properties in 42 states with 7,394 total screens. Headquartered in Knoxville, Tennessee, about 78 percent of Regal’s properties feature stadium seating, with close to 100 percent of screens outfitted in digital format and 50 percent being 3D. Key brands operated by Regal include Regal Cinemas, United Artist, Edwards, Great Escape Theaters, and Hollywood Theatres. In 2013, close to 70 percent of profits came from admissions, but Regal is expanding into offering meals and beer to help boost concession revenues. Popular food items offered include Cinnabon Gooey Bites, gourmet pizza, chicken nuggets, corn dog nuggets, ice cream, and normal movie snack foods. The firm’s geographic position strategy is to locate in midsize metro areas and in the suburbs of larger metro areas.

Regal is aggressively acquiring smaller theater companies, such as Hollywood Theatres and Great Escape Theaters, and divesting others. Regal even has recently swapped several properties with top competitor AMC. Regal, AMC, and Cinemark are partners in CineMedia, a company specializing in marketing and advertising, with Regal currently having a 20 percent stake in the firm. Regal had revenues in 2013 of over $3 billion with $157 million net income. However, 2014 net income was only $105 million, with revenues totaling just under $3 billion.

AMC Entertainment Holdings (AMC)

Founded in 1920 and headquartered in Kansas City, Missouri, AMC operates over 330 theaters and 5,000+ screens and focuses on urban markets in the United States, with a small market share in Canada, United Kingdom, and Hong Kong. The firm has the largest or second-largest market share in many of the top U.S. cities, including New York City, Los Angles, Atlanta, Chicago, Dallas, and more. AMC also operates four of the top five-highest grossing theaters in the United States, and 22 of the top 50. AMC estimates that over 200 million guests visit their properties each year. Historically, the company operated many theaters around the world, but started divesting overseas properties in 2009. All AMC theaters are digital and 3D enabled. AMC offers IMAX at 150 locations, and dine in and premium seating at 11 and 35 locations. respectively.

AMC has over 18,000 employees, many of whom are part time. The company had revenues of $2.7 billion in 2013 with net income of $364 million. Dalian Wanda Group, a Chinese-based firm, acquired AMC for $2.6 billion in 2013.

Key properties include Kerasotes, Loews, and General Cinema. Like its rivals, AMC is also upgrading its concession offerings to include typical fast-food options such as chicken tenders, mozzarella sticks, curly fries, and hot dogs, in addition to candy and popcorn. The theaters also offer beer, wine, and mixed drinks. AMC is also remodeling many of its theaters with larger La-Z-Boy–type seats. Many theaters face the problem of having large outdated theaters that are too expensive to tear down, so expensive remodeling efforts are being pursued. AMC experienced a 60 percent increase in sales in Q1 of 2014 from Q1 2013 in newly renovated theaters with the larger seats.

In October 2014, AMC reported a Q3 net income decline of 78 percent to $7.4 million from $335 million a year earlier, while revenues declined 8.9 percent to $633 million. However, 2014 net income for AMC was $64 million down from $364 million in 2013 largely due to a $263 million tax benefit the firm received in 2013.

Netflix, Inc. (NFLX)

Headquartered in Los Gatos, California, Netflix has 50+ million customers in 50 countries and provides over two billion hours of movies and TV shows each month for $8.99 in the U.S. market. Customers watch their programs on demand anywhere in the world with their television, computers, tablets, phones, or nearly any device connected to the Internet, all commercial free and with the ability to pause and rewind as needed. Netflix employs 2,000+ people and had revenues of $4.3 billion in 2013.

Although Netflix does not compete with movie theaters directly, it is a large competitor for customers’ entertainment dollars. Larger HD screens at affordable prices serve as a substitute for customers going to the movies. In a way, Netflix is competing on convenience, whereas the traditional movie theaters are competing on the “outing.” For customers simply wanting to watch a movie, Netflix must be viewed as a serious competitor, especially since many customers already have a Netflix account and can watch movies free, since Netflix offers a one-price unlimited plan. One problem plaguing Netflix is that many of the top movies are not available until 2 years after their release dates on the live streaming. Customers, however, can pay an additional $8.99 for DVD rental service from Netflix with access to the top movies much sooner, generally the same year the movie is released.

iTunes, Red Box, and Hulu are also top competitors of the movie industry. Customers can download movies for a per-movie fee basis from iTunes within months of the movie coming out. Nevertheless, the movie theater industry still is able to control when secondary markets have access to the top films for the time being. However, in October 2014, Netflix partnered with Weinstein Co. and IMAX to show the film “Crouching Tiger, Hidden Dragon: The Green Legend” that was shown only to Netflix subscribers and in selected IMAX theaters.

External Issues

The Summer 2014 total box office receipts for movies in the United States were down nearly 15 percent from the prior year, with receipts of $4.06 billion being the lowest since 2006. The largest movie theater chain, Regal, then announced its desire to be acquired, as the company’s most recent quarter’s revenue declined 15 percent to $694 million. Firms possibly interested in Regal include China Film Group or Mexico’s Cinepolis theater chain. AMC is already owned by China’s Dalian Wanda Group.

In 2009, the movie theater industry began a shift from film to digital projection technology. The advantages of digital for the industry are numerous, including (1) better-quality movies with realism and detail; (2) the ability to send the feed via satellite, physical media, or by fiber optic networks; and (3) no risk of degrading, film tears, or film shipping costs. By 2013, the movie industry in the United States generated $15 billion in revenue, but had an annual growth rate of only 0.5 percent over the time period from 2008 to 2013. The growth rate is expected to increase to 1.5 percent over the next years through 2018.

Barriers to entry are high for domestic firms because the industry is mature, but internationally, the industry still has much opportunity for growth in emerging markets; however, barriers to entry are high in these markets as well. The industry also has experienced rapid technological change in recent years with the shift from film technology to digital movies. Virtually all of the theaters in the United States owned by AMC, Regal, or Cinemark had switched to fully digital by 2014, and most international theaters owned by the three giants have as well.

To better compete in the industry, many competitors are closing underperforming theaters and reinvesting in better food options, stadium seating, plush seating, improved sound and digital technology, and an overall upgrade in atmosphere at better performing theaters with subsequent price increases. Currently, admissions account for 67 percent of U.S. industrywide sales, and concessions account for 29 percent of sales.

Most hurt by recent shifts in the market are smaller movie theater firms that make up 40 percent of the total market. Many of these firms do not have the capital resources available to shift to digital technology and upgrade their facilities. It is estimated that up to 20 percent of this class of theater will close by 2019. Despite the pressures on smaller movie firms, merger and acquisition activity has been limited over the last 5 years, possibly because many of these firms are located in smaller markets—the same markets the larger movie theaters are divesting.

Expenses

The movie theater industry is plagued by low margins, generally anywhere from 3.5 to 4.5 percent, on average, depending on the size of the firm. Larger firms tend to have higher margins. The shift to digital technologies and upgrading existing theaters has significantly contributed to the low margins, along with flat attendance and many other costs associated with the industry. One of the largest expenses for the industry is rental of films, which accounts for around 32 percent of revenues on average. The 32 percent number is only an average, however, and many high-grossing films may receive 80 percent of admission revenues on the opening weekend, with a sliding scale lowering the royalty rate paid.

Since many theaters rent or lease their properties, rent expense is high and accounts for an average of 34 percent of total revenues when adding in utilities. Most workers are considered part time in a movie theater; therefore, wages account for only around 10 percent of total revenues. Concessions receipts comprise about 5 percent of total industrywide revenues on average.

Movie Decline

Summer 2014 witnessed a 20+ percent decline in box office revenue from the prior summer. This trend has been ongoing since 2011 with below-average ticket sales. This also comes at a time when the economy and employment rates are improving in the United States. Hollywood Studios, for example, had their worst summer since 1997 in 2014, and it was the first summer since 2001 that no American film generated $300 million in sales. International markets such as Japan and larger nations in Europe have also seen sales slip. However, revenues have been increasing in regions relatively new to big box American movies, such as China, Russia, and Brazil. As of 2014, around 70 percent of all U.S. box office revenues are generated outside the United States, with some films generating over 80 percent of all revenues in foreign markets.

Future

Cinemark experienced a 2 percent decline in revenues in fiscal year 2014 as the movie industry continues to face increasing pressure from Netflix, Hulu, and other movie providers. In addition, many consumers now have 50-inch and larger TVs at home, providing even further incentive to skip expensive movie outings. Regal also experienced a slight decline in 2014 revenues and AMC experienced a 9 percent decline in revenues. Sales for Cinemark in South America were down significantly, accounting for much of the 10 percent drop in revenues in non-U.S. markets.

Cinemark continues to be dependent on top movie hits. To the extent popular movies are produced and released, customers have shown they will go to a movie theater, but for average movies, many customers wait for Netflix or other mediums to get rights for the movie. Cinemark has a large presence in South America, but this market is not the best place to have resources. CEO Mitchell is in desperate need of a well-constructed 3-year strategic plan to more effectively position Cinemark for future success.