China's film exhibitors begin to think outside the box (office)

It's hard for me to imagine going to the latest blockbuster without popcorn and soda. Perhaps, that's exactly what China's film exhibitors would like me, and hundreds of millions of moviegoers, to do.

Popcorn, a variety of snacks, beverages, plush toys, on-screen and off-screen advertisements… believe it or not, such products and services are generating more (non-box office) revenue than ticket sales for some, if not all, cinemas.

Non-box office revenue is the new growth point for cinema chains in China. It is not uncommon for some cinemas to turn profitable in a sluggish market on the back of non-box office revenue.

According to a report from consulting firm Forward the Economist, revenue from non-box office sales is driving growth of cinema companies in China. Among all sectors of non-box office businesses, ads shown before a film's screening is a major revenue earner, and is expected to hit 20 billion yuan ($2.86 billion) by 2020.

Wanda Film Holding Co Ltd reported the operating cost of the box office business accounted for more than 80 percent of Wanda's total, but its profit margin ratio was only 6.07 percent in the first half of 2019. However, Wanda's merchandise sales and dining contributed 67.43 percent profit margin in the first half of 2019. That was followed by ads, which had a 65.43 percent profit margin in the same period.

Chen Shaofeng, head of the Fenghuo Cultural Research Center at Peking University, said: "An increasing number of Chinese cinema chains are betting on non-box office revenue to boost growth amid a market slump."

Among all categories of non-box office revenue streams, film-related derivatives are likely to generate long-term profit, Chen said.

"On-screen appeals, accessories, conventional toys, and plush toys are important revenue sources as they can be sold even after a film's theater release. China is still at a very early stage in the business. Most Chinese cinemas are still betting heavily on ads aside from box-office receipts.

"But take a look at the world's leading film studios. Sales of film-related derivatives can contribute up to 70 percent of their annual revenue."

Chen said Disney's revenue from studio entertainment, including box-office sales, was only $9.99 billion in 2018, accounting for only about 17 percent of its total $59.43 billion revenue.

Instead, Disney earned a large part of its business from media networks, parks and resorts, and consumer products. Among those, revenue of consumer products and interactive media was $4.65 billion, and parks and resorts netted $20.3 billion in 2018.

"Film-related derivatives' development is on the rise in China with the success of animation hit Monkey King: Hero is Back and Ne Zha. It is also a good thing that Chinese audiences have increasing awareness of intellectual property of film-related derivatives," Chen said.

My friends and I can relate to that. Despite many merchandise stores on Taobao starting to sell Ne Zha-related products at very low prices after the film's success, my friends and I would tend to buy only from authorized merchandise sellers.

"There is a great potential for the development of Chinese cinemas' non-box office businesses," Chen said.