Firms and Markets Mini-Case
Wednesdays at Cinemex
Revised: August 28, 2002 In April 2001, Matt Heyman, co-founder of Cinemex, the largest chain of movie theaters in Mexico City, looked out the window of his office and pondered the future of his company. In just seven years, Heyman and his partners had nurtured Cinemex from a student idea into the largest theater chain in Mexico City, but they faced new challenges every day. Many of these challenges came from competitors. For years competitors ran old, poorly-maintained theaters, but in recent months they had begun to imitate Cinemex’s top-of-the-line exhibition venues. Their latest tactic: offering two tickets for the price of one on Wednesdays. Heyman wondered whether Cinemex should offer a similar deal, or instead rely on the Cinemex brand and hold the line on price. Movie Exhibition Movie theaters – known as exhibitors in the film business – are the last link in the chain of events for a theatrical release: Story Rights Acquisition Pre-production Principal Photography Post-production Exhibition Exhibitors worldwide compete through their locations, their choice of films, and the quality of experience they give their customers. Heyman calls it a straight EBITDA business. Revenue consists primarily of ticket sales (box office) and concessions (food and drink sales). Expenses include film rental (the cost of renting the movie from the distributor, generally a percentage of ticket sales), the cost of facilities, payroll, and the cost of goods sold at concessions. See Exhibits 1 and 2. History of Cinemex Cinemex started with a student business plan. Heyman and two of his business school classmates, Adolfo Fastlich and Miguel Angel Davila, speculated that Mexico was ready for world-class movie theaters. Decades of regulation, including fixed (low) ticket prices, had produced an installed base of old and dilapidated theaters. When the regulations were lifted, Heyman and his colleagues decided that Mexico City offered an attractive market for a high-end chain of theaters. Rejecting job offers from Blockbuster, Goldman Sachs, McKinsey, Pepsico, and others, they took their plan on the road in search of investors. In 1994, they secured $21.5m in equity financing from JPMorgan Partners and a partnership of the Bluhm family of Chicago. The deal is generally acknowledged to be
the largest venture capital start-up in Mexican history. In December the economy collapsed, with real output falling by 15% and the value of the peso falling in half between early December 1994 and mid-1995. Although this made Mexico a lessattractive market in the short run, it also made land cheaper and scared off potential competitors who had seen the same opportunity. Cinemex opened its first complex, Cinemex Altavista, in August 1995. From the start, Cinemex followed a strategy of differentiation through branding. Since all theaters have access to the same films, and in some cases the same or similar locations, Heyman felt that the greatest leverage was in the quality of the theater itself. The low quality of existing theaters presented an opportunity to develop a brand associated with quality, including bigger and better screens, complete carpeting in all rooms, well-illuminated interiors, emergency lights on the floors, modern light cards for promotional placards, and attractive marquees. These amenities, considered standard for decades in most American theaters, were seen as almost revolutionary when first introduced in Mexico. The candy shops were the same in all the complexes, with large displays and well-maintained cash registers that allowed for quick service. Management trained its employees to be courteous and helpful. It was also the first movie chain in the world to introduce its own system for customers to purchase and reserve tickets by telephone and the Internet, and was the only chain in the world with 100% digital sound. This commitment to quality was rewarded by the market. By 2000,...
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