Hong Kong Disneyland Case Study

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Economic Conditions in Hong Kong
Unemployment went from 2.5% in 1997 to over 6% in 1999
GDP fell to historic low of minus 5.1% in 1998, with slight improvement to 0.7% in 2nd qtr. of 1999. Property sector was dominant growth driver in Hong Kong, over 65% of stock market valuation and 50% of bank lending. Tourism was only 4% of economy activity in 1998 and 1999.

Gov’t. hoped to diversify with a tourist attraction.
$104B to territory from tourism in 1996, dropped to $55B in mid-1997. The Walt Disney Company
Cali in 1955, Florida in 1971, Tokyo in 1983, Paris in 1992
Paris deal was heavily gov’t. involved
Investment
Paris
Sold Disney 4,400 acres of land at farmland price
Lent Disney $770M at interest rates considerably lower than market rates Finance most of the infrastructure of the park at $400M
Cash grant of $30M
Accelerated depreciation for capital investment of 10 yrs. In stead of 20. VAT for Disney at 5.5% instead of 18.6%
Disney
Designed & built park
Equity investment of $100M
Arranged for $1B public offering of shares in 1989 on French exchange Arranged for borrowing of $1B from banks at favorable interest rates Return
Paris
10,000 jobs in Paris
30,000 jobs in neighboring countries
$10M additional annual visitors
Increase of billions of revenue
Disney
Management fee as % of revenue
Base mgt. fee of 3% for years 1-5; 6% from year 6
Variable mgt. fee: 1-50% or pre-tax cash flow above a pre-determined threshold Royalties from gross revenues on food, merchandise, etc.
Admission: 10%
Merchandise, Food: 5%
Hong Kong Disneyland
2nd half of 1998 – preliminary discussions
Decided on site near Penny’s bay, Northeast Lantau
Feb. 1999 – Serious discussions
Developed assumptions with Walt Disney taking into acct. Disney’s operating experience in international theme parks & resorts Gov’t. projected financial performance of proposed park

Scale of New Theme Park
In preliminary discussions, Disney preferred to take part in management of park instead of becoming a partner. It would be 2 phases. Phase 1 – Disney theme park
2-3 Disney themed resort hotels with total of 2,100 hotel rooms 28,000 square metre retail, dining & entertainment complex
Phase 2 – Second Disney theme park, additional hotels & expansion of retail, dining & entertainment.

Assessment of benefits
Gov’t. expected huge stimulus to overall spending in Hong Kong. Measured economic benefits derived in terms of primary and secondary value-added contribution to economy.

Estimating Attendance
Projection was for 2 years; 2005-2024
Classes – Local residents, base tourists, induced tourists, business visitors Population grew at 1.7% a year from 6.687M in 1998.
Base tourists would visit regardless: 9.6M in 1998; expected increase rate of 3.3% for period 2005-2020 Business visitors were 30% of base; due to their nature, negligible proportion of total attendance at theme park. Induced tourists – Mainland, lesser extent Taiwan & Southeast Asia Assumed ratio of induced tourists to base tourists – 11.4% in 2005, increase to 13.8% in 207, then 10.8% in 2024 Assumed market penetration for local residents would rise from 19% in opening year of 2005 to 23% in 2024. For base tourists, induced tourists & business visitors would remain at around 15.5-15.8%, 100% and 4% respectively throughout projection period. Visits-per-guest ratios for four categories

Local, base, induced, business = 1.35, 1.17, 1.15, 1.0

Estimated Additional Spending
Gov’t. believed additional spending associated with theme park would generate value for economy. Local residents
Offset by reduced spending on other consumption items due to budget constraints. “Crowding-out” effect. Base Tourists
Additional spending corresponded to their extension of stay in Hong Kong. Estimated spend an additional 0.5 days in order to visit. Induced Tourists
Expected to have narrower source span than base tourists.
Estimated additional spending on air services would be $570M in 2005....
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