Rafi Mohammed

Answering the Age Old Economics Question...Why is Popcorn So Expensive at Movie Theaters

Posted on March 9th, 2007 (0 Comments)

I have fond memories of my graduate school days. Sure there was the humility of being the lowest man on the totem pole (I was once honored to be invited to a big party at a professor’s house…only to later realize that he wanted me to valet his guests’ cars…take it from me, professors are tight on the tips!), but it was a heady/intellectual time of my life. After a night of carousing, we’d end up at someone’s low budget apartment, incense burning, new age music in the background and inevitably argue about the conundrum that has challenged economists for over half a century…why is popcorn so darn expensive at movie theaters!

Bruce Mohl, a business writer who focuses on consumer issues for the Boston Globe, recently wrote a front page article that highlights the high cost of refreshments at movie cinemas (Now Showing: Epic Cost of Cinema Snacks). Mr. Mohl mentions that buying a small popcorn and soda at a movie theater is becoming a big investment. He cites a local Boston cinema where the price of a small popcorn and small soda is $10, the same price as an adult movie ticket.

So here’s my question…what’s wrong with a cinema charging $10 for a small popcorn and soda? We all know that refreshment prices are exorbitant…so it’s not like movie theaters are enticing us in and then tricking us with food high prices. And let’s face it, popcorn and soda at a cinema are not life necessities…it’s not exactly like bottled water after a natural disaster. And prices aren’t regulated…cinemas have not pledged a maximum refreshment markup to consumers or federal regulators. Why can’t movie theaters set whatever refreshment prices they want and consumers simply decide whether or not to purchase?

Let me go one step further and suggest that cinemas setting high refreshment prices actually benefits moviegoers. Stay with me on this one. First, let’s be fair – movie theater chains are “for profit” companies…they have to make money for their investors. Consider the net profits at Regal Cinemas, the nation’s largest theater chain. Care to guess what its net profit margin is? 5%,10%, 20%, 30%, 40%? Nope…in 2006 Regal Cinemas had a net profit margin of 3.3% (earning $86 million off of $2.6 billion in revenues, source: 2/07 10-K filing ). C’mon, a 3.3% net profit margin is not egregious…even Wal-Mart, the low price leader, has a net profit margin of 3.1% (source: 11/06 10-Q filing).

Not surprisingly, concessions heavily contribute to a cinema’s bottom line. John Fithian, president of The National Association of Theatre Owners, states in Mr. Mohl’s article that concessions can account for “as much as 46% of profits.” So if movie theaters trim their concession margins…I’ll give you one guess where they’re going to have to make it up. Yup…movie ticket prices will have to rise.

It should not come as much of a shock that I believe there are different “experience options” of going to a movie, much like the early bird, regular, and chef’s table offerings at restaurants. The lowest priced “early-bird” experience involves just buying a movie ticket and skipping the refreshment line. At the other end of the spectrum, the “chef’s table” experience involves buying a movie ticket as well as pricey refreshments. Much like at restaurants, movie theaters earn more from customers who belly up to the chef’s table relative to those selecting the early-bird option. As a result, refreshment buying moviegoers implicitly cross subsidize those solely purchasing movie tickets.

Now that I’ve discussed the economics of movie theaters, I hope you realize that movie theaters aren’t trying to “rip you off” at the concession stand. They’re in business just like we all are. As a consumer, it’s all about deciding what experience works best for you. If refreshment prices irk you, pass the concession stand with the peace of mind knowing that those popcorn crunchers are subsidizing your movie ticket. And of course, you do have another option…who amongst us hasn’t smuggled in a little candy to a theater at some point in our life?

Please feel free to send me any questions or comments. I update this blog two to three times a week – please consider signing up to be notified by e-mail of a new blog post. Thanks for taking the time to read my blog.

Add Comment
Send to Friend
Email Signup
RSS Feed