- Teaching Notes
The global recession that began in 2008 affected the global theme park industry, and with it the theme park empire of The Walt Disney Company. This case examines the trends assessment and decision making required of Jay Rasulo, chair of Walt Disney Parks and Resorts, in response to these economic challenges. Although Disney remained in a healthy position, the task was to ensure continued viability and success worldwide. Disney history and the theme park product, market, and competition are described. Disney's current strategies and future plans are presented.
- Describe the overall theme park industry, including types of theme parks, points of differentiation, market size, and structure of competition;
- Describe Disney's theme park business, including history, current strategy, and operational considerations;
- Assess markets and competition in the global theme park industry, specifically emerging and mature markets;
- Use critical thinking to analyze how firm type, size, location, or being an industry leader such as Disney can impact market forces and strategic decisions.
It was early 2009, and the effects of what was being called the global recession were being felt across the theme park industry. For the overall domestic theme park industry, attendance and revenues were still increasing, but the year-over-year growth had shrunk in 2008. Disney leadership tried to determine whether or not Disney's theme parks would be immune to global recession. Disney's domestic theme parks were still a major draw for visitors, and dominated all other parks combined. Also, Disney's revenue for the parks and resorts segment had increased by 7 to 8 percent in the most recent two years for which data were available (2007 and 2008), while net income increased by well over 10 percent in each of the same two years (see Figure 1). However, Disney's domestic theme park attendance experienced little to no growth from 2007 to 2008, which fared well when compared to flat or negative growth for domestic competitors, but was still quite lackluster and a concern for Jay Rasulo, chair of Walt Disney Parks and Resorts, and his team. Were declining attendance numbers just a concern for Disney's competitors or a harbinger for Disney as well?
Source: Tabulation and percentages compiled from data available at The Walt Disney Company. Retrieved on December 11, 2015, from https://thewaltdisneycompany.com/investors/financial-information/annual-report
Internationally, the story was mostly positive. Disney's two French theme parks, Disneyland Paris and Walt Disney Studios Paris, together turned a profit in 2008 (Euro Disney S.C.A., 2008), possibly driven by the 15th anniversary of Disneyland Paris. Disney's two Japanese parks, Tokyo Disneyland and Tokyo DisneySea, saw a total of over 26 million visitors (Magical Kingdoms, 2009), driven by the 25th anniversary of Tokyo Disneyland. In China, the middle class was experiencing significant growth despite the global recession, driving Hong Kong Disneyland attendance to 4.5 million in 2008 (Magical Kingdoms, 2009).
The Disney leadership team would need to determine what their next moves should be with regard to their domestic and international theme parks. Domestically, if the trend continued to reflect a gradual decline of visitors to Disney's destination parks and theme parks in general, how would they counter this? Were any changes even necessary, given the increases in revenue and net income seen in 2008 despite the flat attendance?
Internationally, 2008 saw modest Disney park attendance increases, but this also overlapped with two major anniversaries of the parks in Tokyo and Paris. What steps should they take to protect themselves against these markets possibly turning sour once the novelty of the anniversaries was no longer a draw? Was it a viable long-term strategy to rely on China's economy to continue to grow in order for their Asian parks to succeed? Was expanding further into the Chinese market advisable? Rasulo and his team knew that the answers to these questions would define the success of Disney's theme parks for many years to come.
The story of Disney theme parks actually begins in the animation industry, when Walt Disney and his brother, Roy Disney, formed the Disney Bros. Studios in 1923. After five years of little to no success, in 1928, they came across their first hit with Steamboat Willie, the first cartoon with fully post-produced soundtrack and dialogue. Over the next several years, they began producing a series of short films, including the first full-color animated film, Flowers and Trees. After the introduction of Donald Duck in the 1934 film, The Little Wise Hen, Disney released his first full-length animated feature, Snow White and the Seven Dwarfs (The Walt Disney Company, 2015a). This initial full-length animated film was very popular, and would be the first of many such films created by the Walt Disney Studios over the next two decades, which included Pinocchio, Peter Pan, and Cinderella.
Through the 1940s and 1950s, as the Walt Disney Studios had become incredibly successful in the film business, Walt Disney began to plan the development of a new venture—an amusement park unlike any other that existed at the time, which would eventually be called Disneyland. The original idea for Disneyland came from Walt's observations about parks that he would visit with his family: that they were rarely clean or well-kept, and there was nothing for children and parents to do together as a family. Walt Disney would form what eventually became known as WED Enterprises, using this new division as the headquarters for the Disneyland project. Construction began in July 1954, and Disneyland would open on July 18, 1955 (The Walt Disney Company, 2015a).
As was typically the case with Walt, the Disneyland project was not enough to satisfy his entrepreneurial spirit. Wanting to expand to the east, he set up the Florida project (The Walt Disney Company, 2015c). Disney officials acquired 27,440 acres of land—the size of Manhattan—in central Florida between the cities of Orlando and Kissimmee. These acquisitions were done discreetly, which allowed Disney to acquire the land for less than US$200 per acre due to his true identity never being known. Once word got out in 1965 that Disney was planning to build in Florida, an acre of land near Disney's lot sold for US$131,000 (The Walt Disney Company, 2015c).
The initial plans for the Florida project used the newly conceived futuristic community called EPCOT, whose name was an acronym for “Experimental Prototype Community Of Tomorrow,” as the central attraction, with all visitors entering and leaving the property at the southernmost point. After visiting a central welcome center to plan their stay, visitors would be shuttled to EPCOT and then on to experience the industrial park, hotels, shopping spaces, and other attractions. The original plans did not include a sequel to Disneyland; a theme park was included only at the insistence of the board of directors. Disney would use the theme park to his advantage, however, putting it at the northernmost point of the property, allowing visitors to enter the park only after they had visited EPCOT.
Walt would not live to see his dream completed. Walt Disney died on November 15, 1966, with his last involvement in the project being the creation of the Reedy Creek Improvement District, which effectively allowed Disney to work closely with this new improvement authority and bypass local governmental approvals when building EPCOT; Disney himself made the request to the state of Florida, saying he needed a personalized government to develop the land (Palm Beach Post, 2011). Site development began in 1967, with construction commencing in April of 1969. The focus of the construction was not on EPCOT, but instead on the creation of the Magic Kingdom theme park, Contemporary Resort, Polynesian Resort, and Fort Wilderness Campground. The Walt Disney World Resort opened on October 1, 1971, proving to be a more popular tourist attraction that its sister park in California.
Over the next three decades, the Walt Disney World Resort would expand to include three more theme parks (Epcot, Disney-MGM Studios [later renamed Disney's Hollywood Studios], and Disney's Animal Kingdom), two water parks, 23 hotels, a shopping and entertainment district, two miniature golf courses, and four golf courses. Attendance at Walt Disney World theme parks would increase from 10 million in the first year of the Magic Kingdom to 47 million across all four theme parks in 2008. Disneyland would expand as well to include Disney's California Adventure, which welcomed 5.5 million visitors in 2008, with Disneyland seeing 14.7 million (Garcia, 2009).
The expansion of Disney theme parks was not purely domestic, however, as several international sites were opened between 1983 and 2005. Disney's first international theme park came about when the Oriental Land Company approached Disney in the late 1970s about building a theme park in Tokyo. Disney partnered with the Oriental Land Company to complete Tokyo Disneyland. The Oriental Land Company oversaw the project and Tokyo Disneyland opened in April 1983 and welcomed approximately 10 million visitors in its first year (A Disney World, n.d.).
Disney would work next to reopen Disneyland Paris (formerly Euro Disneyland) in 1992. Euro Disneyland had been a well-documented financial failure and Disney changed the name to move away from its rocky history. By 1995, Disney turned a profit and subsequently had seven profitable years. In 2007, Walt Disney Studio and Disneyland Paris topped 12.7 million in attendance (Sylt & Reid, 2008).
Despite the problems in Paris, starting in the mid-1990s, The Walt Disney Company made international expansion a core facet of their business model, which led to significant international theme park expansion in the 2000s. In a span of four years, Disney more than doubled its international presence with three new theme parks:
- Tokyo DisneySea in 2001, an expansion of Tokyo Disneyland Resort with a nautical theme. Tokyo DisneySea welcomed more than 11 million visitors in its first year (the fastest theme park to reach 10 million, doing so just 307 days after opening) and, in 2008, saw attendance of 12.5 million. A year after opening, Tokyo Disneyland and Tokyo DisneySea were estimated to have seen 25.5 million visitors, roughly one-fifth of Japan's population (Legislative Council Secretariat of Hong Kong, 2009).
- In 2008, Disneyland Paris Resort, which includes Walt Disney Studios Paris, saw a 13% increase in attendance year over year and had more visitors than the Eiffel Tower and the Louvre for the year (Sylt & Reid, 2008).
- Hong Kong Disneyland (2005). This was Disney's first venture into the Chinese theme park market, and along with the other international sites was a joint venture for Disney, which held a 43 percent share of the park with the Chinese government holding the remainder. First-year attendance fell short of initial estimates at approximately 5.5 million, and attendance has trended downward since to just 4.5 million in 2008 (Legislative Council Secretariat of Hong Kong, 2009).
While Disney might have built what would be considered the first theme park, this new idea was basically an extension of the traditional amusement park, which has existed for more than 500 years, with the oldest still-intact amusement park being Bakken, which was opened in 1583 in Copenhagen, Denmark. Amusement parks began to take root domestically during the late 1800s and early 1900s, but the Great Depression started a decline of the traditional amusement park that continued through the 1950s, with a limited number of large amusement parks still operating in the United States by the time Disneyland opened in 1955. The popularity of Disneyland would breathe new life into the industry, driving visitors to the larger parks that had survived, as well as bringing new competitors into the marketplace. Theme parks began to be defined by their size and scope, and ranged from small, family-owned, single parks that attracted visitors regionally up to single-site locations that housed multiple parks that were well known internationally.
Ultimately, each of these parks, regardless of their size or how long they had been open, was offering a different version of the same basic product—providing an amusement park experience to their customers. The difference between the traditional amusement park and this new breed of theme park was that these parks now sought to do more than just provide rides or games to their visitors. Instead, they sought to create emotions and feelings with their visitors that would become a hook to bring them back to their park.
To achieve this goal, theme parks began differentiating themselves on several fronts in how they sought to generate those connections, including the following:
- Through attractions: extreme roller coasters; attractions based on movies, characters, or other aspects of popular culture; family-friendly attractions that children can ride.
- Through theming: locations from movies or comic books; foreign countries; locations at a point in history.
- Through soft factors: value for price paid; safety; cleanliness.
Across the industry, there are examples of parks that limit themselves to one or two of these factors, but more frequently, parks will attempt to create a combination of these factors in an attempt to reach a broader base of visitors, thereby generating higher attendance.
The worldwide theme park market was projected to total more than US$25 billion in 2007, with almost half of that revenue being generated in the United States alone. The next-largest markets were the Asia–Pacific and Europe markets, which generated 26.6 and 20.6 percent of that revenue, respectively. Of these markets, Asia–Pacific was considered to be the next emerging market for theme parks, due to the financial growth being experienced in China. Theme park attendance had increased an average of 3.2 percent per year in 2006 and 2007, and was expected to increase by 3 percent per year for the next five years (see Figure 2). Per-capita theme park spending had increased an average of 2 percent from 2003 to 2007, and was expected to increase by 2 to 3 percent per year for the next five years (see Figure 3).
**At average 2007 exchange rates
Source: Pricewaterhouse Coopers LLP and Wilkofsky Gruen Associates. Retrieved November 5, 2015, from https://slon.ru/images2/doc/global-entertainment-book-2008.pdf
**At average 2007 exchange rates
Source: Pricewaterhouse Coopers LLP and Wilkofsky Gruen Associates. Retrieved November 5, 2015, from https://slon.ru/images2/doc/global-entertainment-book-2008.pdf
The competition structure also began to change as the market became more mature in recent decades and a wave of consolidation began to happen. The traditional amusement park in the early to mid-1900s was most likely a family-owned, high-equity venture, whereas a theme park in the new millennium was likely to be one part of a chain of theme parks held by a larger corporation. This consolidation brought with it the opportunity for these larger firms to make the investments that smaller, family-owned operations were increasingly unable to support, including reinvestments into existing parks as well as construction of new, competitive theme parks.
On average, the cost of constructing a new theme park has steadily increased since theme parks were first created in the 1950s. By the 2000s, the historical average had reached around US$109 per first-year attendee (Kaak, 2011), pushed upward by a 21st-century average investment of more than US$212 per first-year attendee (see Figure 4). At this cost, had Disneyland been built today with its first-year projected attendance of just over three million visitors, it would have cost at least US$340 million; in equivalent modern dollars, its actual cost was just over one-third of that, or US$131 million.
Source: Kaak, K. T. (2011). Theme park development costs: Initial investment per first-year attendee—a historic benchmarking study. Table 3, p. 7. Presentation, Graduate Student Research Conference in Hospitality and Tourism, University of Massachusetts-Amherst, January 6–8.
Within the theme park industry, the competition is split into two camps: local and regional parks that cater to local visitors taking day trips, and larger destination parks that attract worldwide visitors taking longer vacations. Might an economic downturn shift some demand away from destination parks with potential guests going on local day trips instead? Also, destination parks such as those located at Disneyland, Universal Orlando, and Walt Disney World exist as a destination, but they additionally compete regionally to attract local visitors.
Individual parks attempt to differentiate themselves based on their attractions, theming, and soft factors, but there is also an aspect of competition involved between parks with regard to admission prices. Historically, regional parks are priced lower than destination parks, drawing more visits from local visitors more interested in their roller coasters or other showcase attractions, while destination parks are priced higher and provide the visitor with a more holistic experience, including showcase attractions, entertainment, dining, and shopping. Would local regional parks pose a threat to Disney?
Looking specifically at Disney's theme parks, direct competition falls into three categories: other destination parks; regional theme parks; and other types of attractions. Examples of competitors from each of these categories are as follows.
The most obvious example of competition with Disney theme parks is Universal Orlando, a destination park operating in the same city as Walt Disney World. The two parks at Universal Orlando are Universal Studios Orlando and Islands of Adventure, two of the top 10 domestic theme parks in terms of attendance in 2008, which drew 6.2 million and 5.3 million visitors, respectively (Magical Kingdoms, 2009). The competition between these parks and Disney's parks typically exists in the form of increasing and improving attraction offerings, with each park frequently adding and refurbishing attractions in order to bring in new visitors as well as to draw visitors away from competing parks. In the Orlando market, Disney and Universal Orlando compete in a sort of symbiotic relationship: Disney continues to be the main draw, bringing visitors into the area who also visit Universal Orlando; Universal Orlando improves their offerings by opening new attractions, bringing more attention to themselves as well as the overall Orlando theme park market.
Disney's competition in regional parks is made up of several competitors, both domestically and internationally. The best example of a competitive regional park is Cedar Point in Sandusky, Ohio. With 75 attractions, 17 of which are roller coasters, Cedar Point often ranks at the top of annual top 10 theme park lists and goes by the moniker “Roller Coaster Capital of the World” (Pakulski, 2008). This specific focus on roller coasters separates Cedar Point from Disney parks, which have a limited number of roller coasters as part of their offerings, none of which would be considered extreme like those at Cedar Point. While not in the same geographical area, factors such as economic conditions, travel costs, and attraction preference force some visitors to choose between parks like Cedar Point and Disney, as indicated in the numbers shared previously. One additional distinction between Cedar Point and Disney is that Cedar Point has a seasonal operating calendar; it only operates during the peak season, when weather and travel patterns are favorable to attendance. Disney, on the other hand, operates year-round, capitalizing on favorable weather, but incurring the cost of theme park operations every day, regardless of forecasted attendance.
While not competing in the same direct industry as Disney's theme parks, other types of attractions compete with Disney for the entertainment dollar of the consumer, particularly consumers who are on vacation. Examples of this type of attraction include: Gatorland in Orlando; Aquarium Sea Life Val D’Europe in Paris, which is one of 35 Sea Life locations worldwide; and Palette Town, near Tokyo Disneyland, an entertainment and shopping complex that includes Daikanransha, a 377-foot tall Ferris wheel (Observation Wheel Directory, 2013). While these attractions may not have a significant positive or negative impact on Disney's attendance, they still generate revenue that is spent at these locations instead of at a Disney park.
While the general idea of a theme park stirs up images of roller coasters and spinning teacups, the operation of a theme park entails much more than just the attractions that bring people through the front gate, and the revenue generated consists of much more than ticket sales. Included in the scope of operations are toll plazas, parking infrastructure, monorails, ferryboats, trams, trains, turnstiles, food and beverage, merchandise, entertainment, photo imaging, maintenance, and horticulture. Regardless of how competitors in the theme park industry attempt to differentiate themselves, these lines of business are present in nearly every park and these parks must take on all of the design, planning, staffing, and financing that come with them.
The revenue-generating lines of business included above (parking, photo imaging, food and beverage, and merchandise) are not only necessary, as visitors either need or expect these offerings, but they are lucrative. To most, this would not be surprising, given their personal experiences with the price of a hamburger or T-shirt in a theme park, as prices are often set to take advantage of captive audiences and impulse purchasing.
Each of these lines of business, including attractions, also creates the need for supply chains to get these products in place to be consumed. This not only includes consumption by the visitors themselves, such as with food and beverage and merchandise, but also includes back-of-house consumption, such as spare parts for maintenance, or flowers for horticulture. The supply chain rarely considered, however, is that of the attractions themselves. An entire industry has been created that provides design of various types of attractions, with theme parks hiring these design firms to design the rides and then working with construction companies to bring them to fruition. The design of these attractions also can entail working closely with other creative inputs, such as movie directors, authors, or artists, to bring their works to life in an attraction. As with other industries, management of supply chains is critical to control costs and quality; this is especially true of attractions, as the safety and reliability of these large investments can directly impact the demand for an attraction and, by extension, for the park itself.
When looking at the theme park supply chains discussed earlier, Disney has selected a very specific way of dealing with, and in some cases vertically integrating into, those supply chains. For merchandise, food and beverage, and other consumption inputs, a sourcing and procurement strategy was developed that Disney has stepped through incrementally, leading from a focus on supplier quality and narrowing the supply base all the way to enterprise-wide supply chains, strategic supplier relationships, and supply chain involvement. Specific tactics taken to realize this strategy have included a backward vertical integration into on-site warehousing of goods, daily replenishment of top-selling items, and maintaining significant international sources of supply to ensure product availability for all international parks. Disney also has taken a proactive stance on this strategy, including these tactics in new theme park development from the start of the design process.
Disney also has integrated backward and vertically into the attraction design portion of the attraction supply chain through the creation of Walt Disney Imagineering, its own in-house attraction and theme park design division. This division is responsible for developing future ride concepts, researching new ride technologies and special effects, overseeing construction of new attractions, and developing enhancements to existing attractions to improve show quality and efficiency. This integration into the supply chain not only allows Disney not only to control the quality of its attractions (along with their safety, reliability, etc.) but also to target its research and development when needed to align with industry trends or to develop attractions based on new movies.
Disney's theme park strategy's primary focus at its parks is not solely on the rides themselves but also on the visitors to their park (referred to as “guests” by Disney). Disney's priorities for theme park operation, which have been taught to its employees (referred to as “cast members” by Disney) in a strictly adhered-to order of importance since 1965, are safety, courtesy, show, and efficiency. These were later supplemented, in order to emphasize the courtesy key, with the Disney service basics, which include phrases such as “I go above and beyond” and “I am courteous and respectful to all guests, including children” (World Class Benchmarking, 2015).
There is little doubt that Disney's theme park strategies had brought success by allowing it to build synergies, maintain quality, and satisfy guests. The question that remained in the face of the economic downturn, however, was if this model would continue to be successful. While there were an infinite number of paths Disney could take given the scope of its theme park business, three key areas were of particular interest: how to hold its ground in the theme park industry, how to expand its reach worldwide, and how to capitalize on technology.
Looking at the theme park industry overall, it was clear that Disney's theme parks were dominating worldwide, with its parks doing well in regions it operated in; this was particularly true domestically, where it held the top five most-visited theme parks in the United States (TBO Staff, 2009). The question was whether or not this domination would continue in the face of a declining economy and aging theme parks. As of 2009, Disney's six domestic theme parks were, on average, 26 years old, with a majority of their attendance being carried by parks that were 27 years old (Epcot), 38 years old (Magic Kingdom), and 54 years old (Disneyland). Of Disney's international theme parks, the average age was 13 years, with the oldest being the most visited, Tokyo Disneyland (26 years). While this age gave most of the parks a classic feel, it also opened the door for increased maintenance and replacement costs as attractions wore out, and reduced demand as guests began to tire of the classic attractions. It was clear that updates, expansions, and new parks would be necessary, but Disney's cost per first-year attendee of new development had become significantly higher than the industry average, which had escalated significantly over the decades (refer to Figure 4). For all Disney parks built after 1990, the average cost per first-year attendee had been more than US$300, while the industry average was half that, at around US$120 (Kaak, 2011).
When limiting the focus specifically to the international parks, Rasulo and his team pondered if untapped markets existed that could expand their international reach. While success at the international parks had been mixed, particularly with the two parks in France, the Asian market seemed particularly promising given the growth being experienced in China's economy and the success Tokyo Disneyland and Tokyo DisneySea had with Japanese visitors. Hong Kong Disneyland, however, which opened in 2005 was not turning a profit and its 4.27 million attendance numbers in 2007 were well below the projected 5 million by the company (Balfour & Einhorn, 2009). China, however, represented a tremendous opportunity and had a population of more than 1 billion people, so it seemed to be worth considering for expansion (see Table 1). Japan remained promising as well, but with an aging population forecasted to be 65 or older by 2055 and 96% of its 25.8 million of its Tokyo Disney visitors being Japanese with only 4% being non-Japanese tourists, Tokyo Disneyland may have a growth constraint (Kubota, 2008). Also to be considered was Euro Disney Paris, which had gone through restructuring in 2005 and had finally turned a profit in 2008 (Sylt & Reid, 2008). Could Disney correct the problems that had plagued its two parks in Europe? Was it just repeating history in China? Had the Japanese market reached maturity? These questions had to be considered for future international growth.
|Table 1.List of Chinese provinces by population, 2007. As shown by 2009, the burgeoning urban populations of many Chinese provinces make them worth considering as markets for new theme parks.|
Source: Adapted from National Bureau of Statistics of China (2009). Retrieved October 24, 2015, from http://www.stats.gov.cn/tjsj/ndsj/2009/indexeh.htm
Finally, technology and innovation were not just factors to consider in Disney's future theme park strategy; they were required, per the direction Bob Iger had given since taking over as president and CEO of The Walt Disney Company in 2005. There was little doubt that innovation had a welcome home in Disney's theme parks, thanks to the research and development and creative efforts of Walt Disney Imagineering, but there were several aspects of the theme park experience that were revenue streams and part of the customer experience. Other considerations that directly touched a guest that were not attraction based: toll plazas, turnstiles, restrooms, merchandise shops, restaurants, information kiosks, websites, and so on may need to be considered in Disney's future strategies. If Walt Disney Imagineering had their finger on the pulse of the future of attractions, then who was focused on the future of everything else? Disney always had been the park that competitors benchmarked from; could they now benchmark from other parks?
- Are theme parks an attractive industry? To answer the question, read the required supplementary reading, The five competitive forces that shape strategy article by Michael Porter (1979), and use Porter's Framework to explain your answer.
- After reading the required supplementary reading, Firm Resources and Sustained Competitive Advantage by Jay Barney, use the VRIO model to analyze the competitive advantages Disney can leverage that regional competitors cannot?
- With the increase in cost per first-year attendee, and given the increases in revenue and net income seen in 2008 despite the lackluster attendance, what investment strategy would you recommend for Disney in the United States market?
- How should a global company like Disney organize itself to effectively compete against regional competitors? What are some problems that might arise?
- Given that Disneyland Paris and Hong Kong Disneyland have had so many troubles, why is it important for Disney to be a global theme park company?
- How should Disney manage its expansion into China given its current struggles in Hong Kong?
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