Noor Halim, CEO of CinePalace Cinemas, felt she was at a crossroads in 2022. CinePalace was a chain of 12 movie theatres in rural Saskatchewan and Manitoba towns like Moose Jaw, Swift Current, Brandon, and Portage la Prairie. "Our mission was to bring the big screen experience to smaller communities that typically did not have the same access to first-run theatrical movies," said Halim. The company was not as profitable as it had been, largely due to the Covid-19 pandemic and associated lockdowns across 2020 and 2021, and Halim was reviewing two proposals for how to improve profits: one proposal advocated greater digital distribution to widen the prospective audience, and the other proposal focused on getting customers to the theatres more often.

CinePalace was founded in 1998 when a group of managers working at Celebrity Cinemas, a major Canadian movie theatre chain, saw an opportunity. While Celebrity built massive new theatre complexes with state-of-the-art picture and sound quality in cities like Winnipeg and Regina, theatres owned by the chain in smaller communities were older and used out-of-date technology. This group of managers, including Halim, believed that the smaller towns deserved top-notch theatres too, and a new chain could compete with Celebrity if it acted fast, grabbed first-mover advantage, and built a loyal clientele. The ploy worked, and CinePalace was born; Celebrity eventually closed all its old theatres in towns where CinePalace theatres had opened.

"Our first two decades were really successful," claimed Halim. Buoyed by a strong slate of movies that appealed to a wide audience, and making use of the big screen and big sound offered, the company had a strong launch. CinePalace kept up with the times, installing 3-D and digital projectors as they became widely available. Operationally it was not very different from most major movie theatre chains, and its primary competitive advantage came from a lack of competition in its markets. Each theatre had two to five screens, depending on the size of the town (e.g., Brandon, population 50,000, had five screens; Lloydminster, population 11,000, had two).

About 800,000 people lived where the company operated, and as of 2019 about half of that number attended CinePalace at least once per year. Halim defined the target markets as moviegoers, families, and males aged 15-25, similar to the rest of the industry. "CinePalace's positioning is movies, and we sum it up in the slogan 'Enjoy the Movie Theatre Experience,'" said Halim, "because that's what we're all about, the whole experience." There was some seasonality in demand, driven by two factors: when the big movies came out (typically summer and around Christmas) and weather, with winter attendance lower due to heavy snowfalls between October and April. Halim calculated that prior to the Covid pandemic, the average customer in CinePalace's customer base went to a movie four times per year, though this average did not really represent the skewed nature of attendance: on average, about 10% went 15 times a year, and about 30% went only once.

Marketing activities were not complicated. The company had a website with pages for each theatre. Information was updated three times a week with news, coming attractions, and a company blog. Movie showtimes were updated once per week. In 2015, Halim had initiated company social media accounts (Twitter, Facebook, and YouTube). She had asked the marketing department to start posting, and they did, with frequent posts in the first few months. This had eventually slowed to about one or two Facebook and/or Twitter posts per week. Even so, the company had 3500 followers on Twitter and 6200 on Facebook, and the two videos posted on YouTube two years earlier (one showing how popcorn was made and one an employee reenactment of a superhero movie fight scene) had over 500 views each. Halim described her feelings about social media: "I thought we'd make

more of a splash, but I believe that with the right content CinePalace could go viral." Showtimes were also advertised in local weekly newspapers and CinePalace bought advertising, primarily around the summertime (costs for these activities are in Exhibit 1).

Product was not entirely under CinePalace's control, as the company had to take the movies that the movie studios offered. With only a few screens in each theatre CinePalace's content purchaser could choose the films that he felt would be most successful, and picked a variety of genres (e.g. action, comedy, drama) to appeal to as wide an audience as possible. Prices were flat, meaning that all customers paid $8.99 with no discounts for seniors, children, or based on time of day. Halim explained "we need to give the same amount per ticket, $4.50, to the movie studios no matter who the customer is or when they come, so the price should reflect that margin across all tickets." Food was offered, with standard cinema fare like drinks, popcorn, and candy sold. The 'confection per customer' (CPC) was $3.71, which represented average customer spend on food products, which carried a 75% margin. Like the skewed nature demand in general, some customers (for example, teens and young adults) spent a lot on food and others spent none.

Despite not really changing the operational model, revenues had fallen over the previous two years. For several months in 2020, the government ordered the theatres to close due to the pandemic. When CinePalace could reopen, there were capacity restrictions, the need to check vaccinations, and requirements for customers and employees to wear masks. By the end of 2021 almost all restrictions had been lifted, but attendance numbers were way down, only at about 40% of pre-pandemic levels. The situation was partly a result of what Halim believed was a weaker slate of movies: "the studios don't seem to release as much content, or content of high quality." Summer blockbuster movies, usually the driving force for company revenues, were few and far between, in Halim's opinion.

Halim was also concerned that other trends in the industry, which pre-dated the pandemic, were threatening the business and wanted to make sure that she prepared the company for these changes. The biggest such trend was shortened time windows for movies in the theatre. When CinePalace was founded, the industry standard was that one year would elapse between a movie ending its theatrical run and its availability on home video. "That was a long time ago," thought Halim, "even before DVD!" By 2018, this time window had narrowed to at most three or four months, which meant that successful films were often still in the theatres when they were available on demand, on streaming services, and as purchasable content (Blu-ray, DVD, or downloads). This left the theatre with very little time to profit from the movies and with less of an advantage, because instead of customers having to wait until the next year to see a blockbuster movie a customer could just wait a few weeks.

To counter the downward trend Halim had asked her team to prepare proposals aimed at increasing revenues and had narrowed these down to two ideas. The first, which was a model adopted by Celebrity Cinemas in its markets, was to stop fighting the changes in the industry and instead jump on the digital bandwagon. This proposal focused on CinePalace growing a digital store for movies. The second proposal was for CinePalace to return to its roots and fight the changes in the industry, and focused on providing incentives for customers to come to the theatre instead of watching movies at home. As either proposal would be a big change in corporate and marketing strategy, there was time for the project succeed, but either option would be expected to be profitable within five years.

The first proposal, to build a digital store to complement and eventually replace the movie theatres, had many positive aspects. CinePalace would go from being a regional, brick and mortar business to a global, virtual business, competing with the likes of Netflix, the Google Play store, and other online content retailers. Digital copies of movies would be sold to customers at an average price of $12. No

physical inventory or locations would be required, margins were strong (40% of the selling price), and it was completely scalable as the business grew. Upfront costs were moderate, with an expected investment of $400,000 to get the project started. New annual costs of $150,000 would be incurred, with all other new expenses being considered part of the variable costs in the plan. An online retail platform would be chosen (e.g. Shopify, 3dCart, Magento) with approximately 8% of revenues given to that partner, separate from other expenses.

Rather than fight changes in the industry and in consumer preferences, CinePalace could fulfill an edited version of its longtime slogan ("Enjoy the Movie Experience") and updating what a movie experience really was. "CinePalace is about movies," said Halim, "it's right there in the name; whatever we choose to do going forward, I would think that it has to be about the product." The long- term goals of the digital proposal were to launch a streaming site to compete with Netflix and become an online 360-degree movie powerhouse, closing all twelve of CinePalace's theatres and removing the fixed costs associated with them ($8 million annually in total, which formed 90% of company fixed costs). The proposal promised a lean, nimble, virtual firm that delivered the movie experience to customers. With literally a world full of possible customers, this proposal seemed to Halim to offer explosive growth: "there are literally more than ten thousand times as many movie customers in the world than in our market!" she exclaimed, "and we'd only need a tiny percentage of that for this plan to work." The idea of shedding the annual fixed costs from the physical locations was also something she saw value in. With the uncertainty posed by the pandemic, the plan had appeal for Halim, as they would never again be reliant on being able to open for in-person customers.

The second proposal was markedly different. Rather than buy into the digital revolution, this option advocated CinePalace stand its ground and promote the value in going to the theatre instead of staying home. It required a larger up-front investment and changes, planning renovations of all 12 theatres and screens and upgrading the sound systems, at a total cost of $4,500,000 spread over three years of renovations. The plan: make going to the theatre an event, with expanded food options (with an expected increase of 15% in CPC but a 5% decrease in food margin), availability of alcohol (which had a higher margin), tiered and segmented prices (shown in Exhibit 2), and more entertainment options, such as E-sports (competitive video gaming) in the theatres and a greater focus on bringing in groups for parties. For example, large families or groups of friends could rent an entire auditorium for the film of their choice for a fixed fee, approximately $350. These value-add services could be used to draw more people to the theatre, or at least get those already willing to come to the theatre to spend more.

Though the plan was technologically simple, the proposal was no less revolutionary, as it challenged the fundamental operational model of the theatre. Rather than changing showtimes once a week, some theatres in larger towns would have more frequent changes, bringing in films that served a niche audience for one or two days only (art-house or classic films, documentaries). Live content (sports, E-sports, live stage performances) could be streamed in the theatres. The community would be engaged as to what they wanted to see in the theatres through market research. The team putting forward this proposal ended their document with the company slogan: ". . . these changes are how people will once again 'Enjoy the Movie Theatre Experience,' but in a new and exciting way."

Halim had to decide which of these two directions to pursue. She clearly had to do something, with revenues continually falling, and she could not do both. "Do we want to try to be the best movie company, and compete in a much larger, richer market, or to be the best theatre company, and only compete in our small communities?" Halim liked to think big and preferred grandiose plans, but business fundamentals and profit were most important. What was the future of CinePalace?

Exhibit One: Marketing Communications Budget Jan-Mar Apr-Jun Jul-Sep Oct-Dec Annual Newspaper (showtimes) 16,000 16,000 16,000 ur 16,000 un 64,000 Newspaper (advertising) 150,000 100,000 80,000 330,000 Radio 25,000 45,000 30,000 30,000 130,000 Billboards 15,000 35,000 28,000 30,000 108,000 Bus Shelters 15,000 15,000 10,000 40,000 Total 56,000 261,000 189,000 166,000 672,000 Percentage of annual spend 8.33% 38.84% 28.13% 24.70% 100% Percentage of demand* 12% 33% 35% 20% 100% *The percentage of annual tickets sales that were typically sold within each period. Source: Created by author Exhibit Two: Proposed price tiers and audience breakdown Price Expected Demand (%) General Admission (GA) 12.50 44% Matinee (GA before 6 PM) 9.50 10% Discount Tuesday (GA on Tuesday) 8.00 14% Child (3-12) 6.00 13% Senior (65+) 7.00 15% Special Event* 15.00 4% *Tickets to events such as e-sports, streamed live performances, etc. Source: Created by author

QUESTION 1 : 

a. Prior to 2020 and the pandemic, was CinePalace profitable? How much did it make in one year?
b. Considering the three segments mentioned in the case (those that go to the movies very often, those that go hardly at all, and those in between), how many theatre visits did each segment represent before the pandemic? How many visits did each represent in 2022?
c. Relative to 2022 attendance, how many additional customers would be required to cover the fixed costs of the second proposal?

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Exhibit One: Marketing Communications Budget Newspaper (showtimes) Newspaper (advertising) Radio Billboards Bus Shelters Total Percentage of annual spend Percentage of demand* $ $ $ $ $ $ Jan-Mar $ $ $ $ $ $ 16,000 $ $ 150,000 $ $ $ 45,000 $ 35,000 $ 15,000 $ 261,000 $ 38.84% $ 56,000 $ 33% 25,000 15,000 8.33% 12% *The percentage of annual tickets sales that were typically sold within each period. Source: Created by author Exhibit Two: Proposed price tiers and audience breakdown General Admission (GA) Matinee (GA before 6 PM) Discount Tuesday (GA on Tuesday) Child (3-12) Senior (65+) Special Event* *Tickets to events such as e-sports, streamed live performances, etc. Source: Created by author Apr-Jun 16,000 Price esis es es es 12.50 9.50 8.00 6.00 7.00 15.00 $ Jul-Sep 16,000 $ 100,000 $ 30,000 $ 28,000 $ 15,000 189,000 28.13% 35% $ $ Expected Demand (%) Oct-Dec 16,000 $ 80,000 $ 30,000 $ 30,000 $ 10,000 $ 166,000 $ 24.70% 20% 44% 10% 14% 13% 15% 4% Annual 64,000 330,000 130,000 108,000 40,000 672,000 100% 100% Exhibit One: Marketing Communications Budget Newspaper (showtimes) Newspaper (advertising) Radio Billboards Bus Shelters Total Percentage of annual spend Percentage of demand* $ $ $ $ $ $ Jan-Mar $ $ $ $ $ $ 16,000 $ $ 150,000 $ $ $ 45,000 $ 35,000 $ 15,000 $ 261,000 $ 38.84% $ 56,000 $ 33% 25,000 15,000 8.33% 12% *The percentage of annual tickets sales that were typically sold within each period. Source: Created by author Exhibit Two: Proposed price tiers and audience breakdown General Admission (GA) Matinee (GA before 6 PM) Discount Tuesday (GA on Tuesday) Child (3-12) Senior (65+) Special Event* *Tickets to events such as e-sports, streamed live performances, etc. Source: Created by author Apr-Jun 16,000 Price esis es es es 12.50 9.50 8.00 6.00 7.00 15.00 $ Jul-Sep 16,000 $ 100,000 $ 30,000 $ 28,000 $ 15,000 189,000 28.13% 35% $ $ Expected Demand (%) Oct-Dec 16,000 $ 80,000 $ 30,000 $ 30,000 $ 10,000 $ 166,000 $ 24.70% 20% 44% 10% 14% 13% 15% 4% Annual 64,000 330,000 130,000 108,000 40,000 672,000 100% 100% Exhibit One: Marketing Communications Budget Newspaper (showtimes) Newspaper (advertising) Radio Billboards Bus Shelters Total Percentage of annual spend Percentage of demand* $ $ $ $ $ $ Jan-Mar $ $ $ $ $ $ 16,000 $ $ 150,000 $ $ $ 45,000 $ 35,000 $ 15,000 $ 261,000 $ 38.84% $ 56,000 $ 33% 25,000 15,000 8.33% 12% *The percentage of annual tickets sales that were typically sold within each period. Source: Created by author Exhibit Two: Proposed price tiers and audience breakdown General Admission (GA) Matinee (GA before 6 PM) Discount Tuesday (GA on Tuesday) Child (3-12) Senior (65+) Special Event* *Tickets to events such as e-sports, streamed live performances, etc. Source: Created by author Apr-Jun 16,000 Price esis es es es 12.50 9.50 8.00 6.00 7.00 15.00 $ Jul-Sep 16,000 $ 100,000 $ 30,000 $ 28,000 $ 15,000 189,000 28.13% 35% $ $ Expected Demand (%) Oct-Dec 16,000 $ 80,000 $ 30,000 $ 30,000 $ 10,000 $ 166,000 $ 24.70% 20% 44% 10% 14% 13% 15% 4% Annual 64,000 330,000 130,000 108,000 40,000 672,000 100% 100%