Cesar R M
Well-Known Member
Until Disney opens its books, all we can do is speculate using numbers that Disney publishes. So ...
Let's speculate.
Disneyland Paris (DLP) started hitting Disney's books in the second half of FY2004. It might surprise many but, 2014's abysmal performance aside, DLP has positively contributed to operating income most years since 2004. However, as you suggest, margins have not been good.
The thing to recall is that the DLP numbers proportioned to Disney's Parks & Resorts (P&R) are just a fraction of the segment's overall numbers. It's somewhat akin to hotel occupancy; DLR could have a horrible occupancy but since WDW makes up about 89% of all domestic hotel capacity, domestic hotel occupancy overwhelmingly is about what's happening at WDW.
The overall theme park operating margin is similar. Last year, Disney's domestic operations accounted for 82% of P&R revenue, and let's not forget that the remaining 18% included DLP, HKDL, and royalties from TDL. Effectively, DLP is a fraction of a fraction.
There is no question that DLP pulls the overall number down but the impact on margin is perhaps 2%, especially since Disney collects management fees from DLP and HKDL. In recent years, Disney's P&R margin is significantly worse than 2% when compared to WDW's Golden Age.
Don't get me wrong. Disney's international operations are pulling P&R's numbers down but it would be incomplete to heap P&R's lackluster operating margin solely on DLP.
That's a reason to question how P&R is being run. Why is Disney sinking billions into Shanghai if it's unhappy with overseas results? Perhaps Shanghai is about Iger's ego more than anything else? Perhaps the "Disney CEO Fumbles Entry to China" article had to be deleted exactly because it raised valid concerns?
Other factors should more than offset the negative impact of international operations:
All things considered, Disney's domestic margins should be higher than what they used to be, more than offsetting poor international performance.
- In recent years, Disney has increased prices faster than costs. This has improved margins but P&R is still well below its historical average.
- Domestic operations are experiencing record crowds. The incremental costs of handling an extra 10,000 Guests per day are much less than the costs of handling the first 10,000 Guests.
- Disney added 2 large cruise ships that are running at near-100% capacity and produce strong margins. DCL is perhaps the most expensive major cruise line in the world.
Regarding hotels, please recall that comparatively few hotels have been constructed this century. Therefore, it would be misleading to suggest that today's P&R margins are lower than they once were because of hotels. After all, Disney has increased rack rates considerably. Like theme park prices, hotel margins should be up as a result of these higher prices. If they are not, then something has changed to drive hotel margins down. What might it be?
One possibility is that Disney has a heck of a lot more DVC rooms.
Since the start of the century (and the start of the decline of Disney's margins), Disney has more than tripled the number of timeshare rooms. Guests who used to pay higher hotel rates are now paying a premium one year and paying greatly reduced rates for the next 49 years. It's even affecting occupancy (and margins) at the Moderate Resorts.
I'm a DVC member but I've railed against the financial evils of DVC for some time. They are hurting margins since they steal from future profits; great for a CEO who wants a big, fat bonus this year but bad for the next CEO. This is not an attack on DVC members. However, this is an indictment of Disney's current management, who are more concerned with this year's stock options than with the long-term profitability of the business they are supposed to steward.
That's the point. By constantly focusing on squeezing out a few more pennies this year, Disney's management creates new problems that affect profitability later.
To be clear, DVC is not the only reason for lower margins. However, it is representative of a corporate culture that's more concerned about immediate returns over long-term growth. As I've previously written, if Disney's current management was running the company in the 1980s, today's WDW would consist of the Magic Kingdom, Downtown Disney, and a bunch of timeshares.
But they'd sure as heck have bought back a lot of company stock.
Universal, which has had similar price increases as Disney in recent years, has seen its operating margin soar to over 30%. The difference is that Universal invested intelligently in its domestic parks and is reaping the rewards. And they are not building timeshares.
Instead of investing in Disney's single biggest money-making machine, Disney has looked for ways to squeeze pennies out of WDW. It's got a small army of intelligent and well-compensated professionals trying to figure out how to improve margins on napkins by 0.0000005 cents per unit but is unwilling to figure out how to grow P&R revenue by more than the unremarkable 5.9% it's averaged under Iger.
Failure to properly capitalize on the awesome earning power of WDW, along with other questionable decisions this century such as letting J.K. Rowling walk, have hurt P&R profitability.
best explanation ever!
