The BoxOffice Interview: Carmike CEO David Passman
on July 15, 2014
David Passman doesn't shy away from challenges. The president and CEO of Carmike Cinemas has firsthand experience in guiding a company through a changing marketplace in the face of digital innovations. He joined the regional exhibitor in 2009 after acting as CEO of IBS-STL Inc., a book publishing and distribution company, coming into the exhibition industry as the transition to digital and premium formats was in full swing. Passman also acts as the chairman of NATO, a role that brings an array of responsibilities and necessitates understanding the industry's concerns and challenges in today's marketplace.
BoxOffice CEO Julien Marcel caught up with Passman at this year's edition of ShowCanada to get his take on the most recent trends in exhibition and ask Passman about his roles at Carmike and NATO.
Regarding the Screenvision acquisition, is the single-player situation a good situation? What's your take on that?
I view it as good primarily because national advertisers in the U.S. have been finding it difficult to get their campaigns going across large and small DMAs. Dealing with two companies is a lot of work for very little advertising budget. National advertisers in the U.S. spend billions of dollars, and they spend very little in cinema. And even if they used up all of our available screen time, they still would be minor amounts of advertising budget relative to their at-home, or even in- and out-of-home, advertising budgets. So, it's an inconvenience for them, for the national advertisers, to do business with us. Some of the ones that we have particularly struggled with have been large franchises, for instance. We see this merger as good for advertisers, we see it as a nonevent for consumers, and we see it as very beneficial for us in exhibition
You've been in the headlines a lot recently, not only with your role in Screenvision but also with the recent acquisition of Digiplex. Where does this acquisition take you on your path toward your locations target? Is it a step in your development, or is it your endgame?
We have stated a strategic objective of 300 locations and 3,000 screens, and this acquisition will get us within about 20 locations of 300. It is wonderful for us to be that far along this early. We only announced this objective about a year and a half ago. At this stage, we haven't said publicly and we don't know if this size is the final step or an interim step. At this point, what we do know is that 300 sites and 3,000 screens is manageable by our current infrastructure-all of our home-office people, our accounting systems, our payroll systems, the technology we have, and the people that we have. We will have to digest those acquisitions for several months. Then we will have a good feel for how much more scalable our systems and people and processes are. And if they are, then we might very well want to continue to grow. What I don't want to do is to grow revenue, number of locations and level of difficulty of running a company but not be able to return anything to the shareholders through net income.
There is a trend in the market toward more and more consolidation. Where do you see this trend stopping, and when does it start hurting the industry as opposed to helping it?
I believe that most mature industries that have many individual or small owners find a need to consolidate at some point. That happened in sporting goods, in grocery stores, in department stores, all kinds of specialty retail stores. And the reason is really simple. When the industry matures-and we certainly are a mature industry- the only way you can grow profits for your shareholders is to consolidate in order to eliminate inefficiencies in administrative expenses and take advantage of better purchasing power than smaller organizations. This trend also provides an opportunity for the smaller independents to leave a legacy and to secure their family wealth.
Can you tell us about the strategy that you have implemented in running Carmike?
I think the strategy that my team and I put in place when I came on board saved our company. It was headed off the cliff and was in fairly significant financial distress. There were several things we did, but I believe one of the most important was convincing our theater managers and their staff to look at their theater properties the same way our guests look at theater properties. If they can just imagine the experience through the eyes of our customers, they will make good decisions on how to serve them. And they began doing that right away. We had several facilities that were not very well maintained in our circuit five years ago, and now I would say we are one of the best-maintained physical facilities in the industry.
We started with the physical plant, then we addressed the human resources, and finally we have focused on increasing revenue. We wanted to get our customers back to our theaters, and then we wanted them to spend more. We made sure that they knew where we had bargains... We have been pretty passionate about increasing concessions sales-a very large gross margin.
At the corporate level, we created an initiative called "low-hanging fruit." I just asked the question: "What can we do to improve our cost structure without negatively impacting our customers or our employees?" We came up with 25 multimillion-dollar cases of things that could be improved, things like old contracts with telephone suppliers, property taxes on theaters that we had abandoned, things like that. The combination of the low-hanging fruit initiative and the concessions revenue increase allowed us to pay down over a hundred million dollars of debt. For the size company we were, that was a very big improvement.
Dining initiatives are an emerging trend in the industry. You have experimented with different types of dining, from premium to casual. What have you learned from those experiences?
I am still learning about it, quite honestly.
Over the last three years, we have been studying the different kinds of dining opportunities. Some include single auditoriums with tableside dining service, where waitstaff will take your order and deliver your order. Some include full theaters; some include all auditoriums allowing food, but you have to get your food, order your food at the restaurant outside the auditorium; some have service where you can order your food before the showtime in the auditoriums, but once the shows start, no more service.
The most sustainable, with few exceptions, are the auditoriums that have casual dining, reasonably priced, middle-market white-collar down to light-blue-collar clientele, with adult beverages, alcohol service, and plenty of choices that are not egregiously priced. Theaters such as Studio Movie Grill, Movie Tavern, and Alamo Draft House are all reaping the rewards of being the first movers in this. Their theaters do very well on attendance, and they appear to be very profitable. I think that is the model that we will deploy most often in the future. We've got two or three of those that we expect to have in service around Thanksgiving this year and, if our study is correct, and they work, we will roll out several of those every year.
What are the current results of the promotional activity you have developed-Stimulus Tuesday?
What we have found is that people generally are looking for value. Our Stimulus Tuesday promotion was aimed at bringing people into the movie theater during the downtime or slow period. What we found is that by offering very significant discounts on a couple of concession items, it made people want to be there without having to give them a discount on admission tickets. On a Tuesday we now see younger people dating, we see grandparents taking grandkids, we see senior citizens coming, and almost all of them buy the highly discounted concession items on that Tuesday, whereas, in the past on a weekday, concession items would be a lesser percentage of sales. What I find amazing is that we see people that come on Stimulus Tuesday because it's Stimulus Tuesday, but they don't take advantage of the discounts. They still buy large popcorns and large soda, but it's a cool place to be on Tuesday. So crowds beget crowds, and Tuesdays are now a fun time at Carmike.
In a recent column in BoxOffice, John Fithian highlighted the concern at the number of movie theaters outside of New York and L.A. with the potential current lack for enough movies. Do you see the diminishing number of releases from studios as a reality that theaters around the country are already facing?
I know some of the major studios are cutting back on some of the number of movies that they provide, and for me as an exhibitor, the more movies we have the better. So I think John is correct in saying we'd rather not see a reduction. On the other hand, we show well in excess of 300 unique movies a year, and we don't currently have a lack of product.
My dream is for all studios to spread out all movies throughout the calendar year. The tradition and the history of seasonality in movies has been challenged the last few years with huge success. It started with Katzenberg's releases in March for kids-that was highly successful. Disney released Alice in Wonderland in March 2010, and it was a very successful March movie. Before that no one ever thought a movie could be successful in March. And then, of course, Lionsgate came out with Twilight and Hunger Games, and those have been successful. A little movie in October called Gravity [laughs]-nobody thought an October release could be successful. And over and over again, what we're finding is that movies can be successful any time of the year. I certainly appreciate the difficulty of taking a unique film and taking a chance with a new "time zone," but it has been successful for those who have tried it.
What are your thoughts on alternative content? Has it already proved successful?
I'm in, hook, line, and sinker! I've been passionate about it for a long time. I just haven't been able to do anything about it. Now that the other three major exhibitors are all digital, we have a lot better chance of getting more alternative programming. And one of the hidden assets of Digiplex, and why I was so anxious to get that acquisition done, is that this company is run by an industry icon [Bud Mayo] who is a genius at alternative programming. I'm hoping we can convince him to stay on with us and help us achieve, in the bigger combined company, the same level of success that he has at Digiplex.
Digiplex is the only exhibitor I am aware of in the nation, and probably in North America, that has nearly 5 percent of its box office in alternative programming. Imagine what that would do for us if we could get to 5 percent revenue. That would be fantastic! And that would be off-peak hours.
One year ago you surprised the market by entering into a relationship with MovieTickets on top of the existing relationship with Fandango. What was your vision then, and what's the status one year later?
We love our relationship with Fandango as well as our relationship with MovieTickets.com. But, for me, it gets down to one simple thing: our consumer. Our valued guests should be able to purchase tickets in any medium that they want. I don't like the notion of them being forced to Fandango or to MovieTickets or to any other supplier. I believe they ought to come to Carmike, and if they love the ads that Fandango runs, then go to Fandango and buy it. If they love the ads that MovieTickets run, they can buy it there. For me, it's access, and consumers want multiple access points and I want to give it to them. The reason we didn't renew an exclusive arrangement with Fandango is just that. It wasn't money for me, but I believe that is an important ingredient for consumers.
You've been the chairman of NATO for a couple of years now. What is it that keeps you passionate about this part of your responsibilities? What do you want to achieve?
I love my role in NATO. I've been chairman almost three years now, two and a half years. Near the end of my first two-year term, the nominating committee nominated me for a second term. That was somewhat unprecedented, and I was honored to do it, not because I'm such a good chairman, but just because I love being in the role.
The thing I came into the chairman role with, and the thing I hope to continue in my tenure, is we had burned a lot of bridges between us and studios by taking hardline positions against each other. It was primarily around windows and the premium VOD. We truly don't believe premium VOD is a good answer. The life of any movie should be stretched as long as possible in as many different windows as possible ... The benefit that exhibition gives studios is enormous for the lifetime value of a new movie. We believe we can be important partners in that. We had restored a lot of poor relationships with studios in my very first six months, just by taking a different approach. If the studios fail, we fail. If they can't give us movies, we don't have anybody to sell popcorn to. And if we don't have great facilities for them to show their movies in, people are not going to continue to come to our movie theaters. So, it's a highly dependent relationship. We're in this together, why not work together?