Home Retail “The demand for films is much higher in small cities”

    “The demand for films is much higher in small cities”

    By  
    SHARE

    Stargaze Entertainment runs a chain of multiplexes under the brand name of Glitz cinemas. It has a unique strategy of focussing only on small towns and avoiding the metros. Sumant Bhargava, Founder and MD of Stargaze Entertainment, talks to Sanjay Choudhry about the potential the tier ii and iii cities offer for a multiplex chain and the challenges faced by the operators.

    Q. Please give us a background of Stargaze Entertainment.

    We started Stargaze Entertainment in 2008. Network18, which is the single largest investor and shareholder in the company, has committed investments through their private equity arm called Capital18. We currently have presence in cities such as Ajmer, Kurukshetra, Raipur, Ranchi, Dehradun, Bilaspur, and Jodhpur, and we are aggressively looking at other cities in similar geographies. We have built 22 screens across 8 locations in tier II cities until now, barring single screen that we comanage in Delhi.

    Q. Why did you choose only tier II cities for opening your cinemas?

    I felt there was a latent demand for the film exhibition industry in these locations. The cinema exhibition infrastructure exists there but is very dilapidated. The demand to watch films is actually much higher in smaller cities than the metros because that is the only mode of entertainment available to people. With this premise, we initially entered a few cities like Kurukshetra and Ajmer, and were surprised to see what people were willing to pay to watch movies.

    We track an average ticket price of Rs 139 as of Dec 31, 2011, compared to Rs 157 for PVR, which is really notmuch of a difference considering the fact that 80 percent of PVR screens exist in only Delhi, Mumbai, and Bangalore. Our average ticket price is Rs 139.41 in tier II cites. We roughly make an investment of Rs 20 crore per screen and it is a hard fit-out.

    So it is a misconception that people in smaller cities are not willing to pay to watch films. They are ready to shell out the money to watch movies if you give them a good quality cinema exhibition infrastructure.

    Q. What challenges did you face initially in small towns?

    The first challenge was retail space. These cities have a less number of malls. For example, Kurukshetra, Ajmer, Ranchi, Dehradun, and Jodhpur have only one or two malls each. Secondly, talent is a very big issue that we are struggling with. Nobody from the metros is willing to work in small cities. The attrition rate is very high. Locally, there is no talent available and people who are good are already moving to the metros.

    The third challenge is the whole taxation issue that is bothering us. We have to pay service tax, rentals, and entertainment tax. There is VAT that we pay on food. Now a service tax has been introduced on payment to producers as well.

    Q. Do you think the industry is overtaxed?

    Yes it is. Practically on every cinema ticket, there is entertainment tax and service tax. And now there is a service tax on the rentals too. So just to run a cinema, excluding the food part, we are paying service tax, entertainment tax, and another service tax to distributor on what we are earning. Actually, 60 percent of our entire revenue goes in paying taxes!

    Q. Will it make sense for you to run stand-alone cinema halls?

    No, because if you are running a traditional cinema hall and a mall with a multiplex comes up, people will simply shift there and the business will shut down.

    Q. How much time does it generally take to break-even for a multiplex in a mall?

    The operating break-even and cash break-even can happen in two months. But break-even in terms of investment would take anywhere between two-and-a-half to seven years, depending upon the location.

    Q. What is the average occupancy at your theatres?

    Average occupancy for us is between 27 and 30 percent.

    Q. How much occupancy level would you consider satisfactory?

    About 22 to 23 percent.

    Q. Is it enough if only 22 to 23 percent seats are occupied in a cinema hall at any given time?

    I have a very different opinion on occupancy. It is actually a denominator, a function of how many shows I am playing in a given day. So if I play a show at 9:00 in the morning and another at 11:00 in the night, my daily occupancy is bound to be lower because very few people would come to watch a movie at these times.

    So it is unfair to start evaluating the overall occupancy based on these shows. The incremental cost to run additional shows is not very high for me. Occupancy to me is not really a good indicator of how well is a cinema chain doing. I think admissions and revenues and one’s ability to grow these for the same cinema year after year are critical rather than just occupancy figures.

    Q. What are the food habits of people watching movies in tier II and IIi cities?

    The consumption of local food is very high in smaller towns compared to the higher-priced items.

    Q. How much is the contribution of food in your revenue?

    It is about 26 percent of our total revenues.

    Q. When you enter smaller cities, what kind of retail space and demographies do you look at for opening your cinema?

    A city with a population of about 7 to 8 lakh is good enough for us. We also carry out an assessment of the per capita income a city can offer. Also, a very important factor is how strong a movie culture does that particular city have. For example, the population of the Muzzaffarnagar town in UP is just 6 lakh and the per capita income is quite low, but the city is very strong on films, so it makes sense for us to open a cinema there.

    Q. How much is the percentage of revenue share with malls?

    About 14 to 18 percent of the net.

    Q. Is there any minimum guarantee offered to the builder as well?

    Sometimes, but mostly it is purely revenue share. We do minimum guarantee in cases where the builder is investing a lot of money. For example, in Yamuna Nagar, the builder is practically making the entire cinema for us except the three auditoriums. Washrooms, lobbies, glass – everything is his responsibility except for seats, carpet, sound system, projection equipment, furniture, etc. So there we have given him a minimum guarantee.

    Q. Is it a long-term contract?

    All our contracts with mall owners are long term, running into 15 to 21 years.

    Q. What are your future plans?

    We are planning to enter Muzzaffarnagar and Yamuna Nagar, and also plan to open one more cinema in Raipur this year. Then we are going to open three more theatres in cities as diverse as Jamnagar and Bokaro. We are planning to add 18 more screens before March 2013.

    Q. Your fortunes as a cinema chain are tied to those of the malls. If a mall is not doing good, will it impact your business as well?

    Before we are operational, we are completely dependent on the malls. But after the mall becomes open to the public, it works both ways because at the end of the day only two things can pull in footfalls in these small cities: cinema and Big Bazaar. If we do well, the mall also tends to do well. If the mall has a great mix of brands and retail, we tend to benefit from it. It is not that we are entirely dependent upon the malls, but yes, the property has to be maintained and built well. You can’t normally have a badly built mall and expect it to do well.

    Q. Are you looking at some kind of foreign investment to fuel your growth?

    We are in fact looking for an international partner very aggressively. We plan to attract strategic investments from global players in the cinema industry who have stayed away from the Indian market because of issues such as the high taxation and low ticket price.

    Q. What is your assessment about FDI in this industry?

    The FDI issue is still very unclear for cinema exhibition. We don’t know whether we are a part of the retail industry or whether we are a part of the film industry. The association of multiplex operators is still trying to clarify this issue with the government because that has a direct bearing on our prospects of getting funding from abroad. But I think we may finally get treated as retail if foreign investments are to come in. We should actually be classified as single-brand retailers.

    Q. What kind of regulatory changes are you looking at? What is your wish list from the government To give the industry a boost?

    I feel there should be a standard entertainment tax across the country, which should not vary from place to place. Currently, the entertainment tax is a state subject in India, so every state comes up with its own tax rates. Each state has its own policies for paying and refunding the tax. There is no uniformity. Delhi is currently the best, with 20 percent tax. All cinemas make money there. The Multiplex Association of India has proposed a standard entertainment tax of 15 percent across the country, which will make things easy for us.

    Another huge issue, against which all the retailers, real-estate developers, and the multiplex operators fought, is the service tax on renting of commercial property. This decision of the government has been upheld by the court, so we now have to pay service tax on rentals which will increase costs. There is also VAT on food. Another issue is the service tax on film distributors which will kill us.

    Q. What expectations do you have from the upcoming GST regime? How will it impact you?

    We are expecting the GST regime to iron out things a lot. We are not clear that, if there is GST, what will happen to the entertainment tax. Ideally, everything should be covered under GST, but we are unclear because entertainment tax is a state subject. Uniformity in taxes will go a long way in solving our problems.

    Q. Why are some states exempting your cinemas from tax?

    To encourage investments in infrastructure.

    Q. How much are you growing every year in terms of turnover?

    For the last three years, our revenues have more than doubled every year. Our expected turnover for this year is about Rs 36.5 crore and next year we expect it to be at least Rs 75 crore.

    Q. Do you have any future plan to come to the metros?

    No, we are very clear that we would not be entering metros at all. The reason for this is our strategy. I am much happier running a multiplex in, say, Ranchi, where there are only 2 multiplexes, than running one in Delhi where there are 14. There is no sense being one multiplex among more than a dozen. It just pulls up your overheads a lot.

    Q. What is your vision for the future? How do you see yourself in 5 to 10 years from now?

    I would ideally like to see Glitz Cinemas as the single largest multiplex brand outside of the top six cities in India. It is possible in our industry because cinemas are always a local brand, not a national one.

    Q. What about national cinema chains like PVR which are doing well?

    In places like Kurukshetra, Ajmer or Jodhpur, people don’t know PVR. They only know the local theatre. It does not matter to them if there is no PVR in their city. For them, the brand of multiplex operating in their town is all that matters.

    *This interview was originally published in May 2012 issue of Images Retail.