Widespread inflation is shaking economies and squeezing consumer budgets. According to the US Bureau of Labor Statistics, the consumer price index rose 8.3% year over year in April. That was just a little less than March’s 8.5% year-over-year gain, but it’s still uncomfortably high.
One of the major components of inflation is energy, which makes people pay more to put gas in their cars to go to the movies. Rising inflation could be good news and bad news for AMC Entertainment Holdings (AMC -8.29%). Let’s look at each perspective.
The potentially good news for AMC
AMC is burdened with significant fixed costs; The cost is about the same regardless of revenue. That crippled business early in the pandemic, when it was forced to close its cinemas for months. Although revenue fell to zero, AMC was required to cover rent or lease payments on its theaters and interest expense on its debt.
Now that people are returning to theaters, AMC’s revenues are skyrocketing. For the quarter ended March 31, revenue increased to $785 million from $148 million in the year-ago quarter. Again, the high fixed-cost business model means that a large proportion of expenses remain relatively constant even as revenue increases.
How might inflation help AMC in this scenario? The company could increase the prices of tickets and concessions. With prices rising across the economy, theater price increases would not be viewed unfavorably.
Indeed, this is the path AMC has taken. It has increased ticket prices in its U.S. markets by a whopping 15.8% as of March 31, nearly double the rate of inflation. So far, consumers have not shied away from the increase and continue to visit the cinemas. However, due to the significant disruption caused by the pandemic, it may be difficult to estimate changes in attendance.
The potentially bad news for AMC
Rising inflation is forcing households to pay more for essentials like groceries and rent. This leaves less money for discretionary entertainment than a night at the movies. It could prompt households to replace more expensive entertainment, like watching a movie in AMC theaters, with less expensive similar experiences, like streaming a movie at home.
In fact, consumers have been doing this for the last two decades, even before inflation started to bite. Between 2002 and 2019, the number of movie tickets sold in the US and Canada fell from 1.575 billion to 1.24 billion. Cinemas have steadily increased prices without offering any additional value to consumers.
The industry’s only innovation is power-adjustable leather seats, which have replaced cloth seats. After consumer reaction and the drop in ticket sales, that was hardly a reason to force people to pay higher prices.
It remains to be seen how inflation will ultimately affect AMC, but I believe it will be positive overall. The company is burdened with such high expenses that it is posting massive losses on the bottom line. Sales have to go much higher to break even. Visitor numbers have been declining for decades, and it seems the only hope is rising prices.