Movie Theaters make greater profits than Big Oil


Tax Hollywood !

CHRISTIAN SCEINCE MONITOR

Congress’s unsound fury over Big Oil

Movie theaters capture more windfall profit than oil companies.

With this summer’s high gas prices, Americans are trading in their traditional vacations for “staycations” – vacations much closer to home.

But compared with other things Americans might do, driving is still a bargain.

Consider, for example, the costs of going to a movie:

To take a family of four to a movie at an AMC Theatre, it will cost anywhere from $55.75 to $71.50, depending on whether the family shares movie snacks or not, and this does not even include gasoline.

For that same $71.50, the family could purchase enough gas for their car (of decent gas mileage) to drive from Disneyland to Las Vegas and back again. And for the price of tickets and extra-large refreshments, , they could drive from Disneyland to the Grand Canyon and back again.

Where are the calls for federal investigation into price gouging at concession stands?

For years, populist politicians have dragged oil industry executives to Capitol Hill and accused them of price manipulation. Every time gas prices increase, liberal lawmakers direct the Federal Trade Commission to investigate oil industry price gouging. To their chagrin, the FTC has never found oil industry price manipulation.

What evidence does congress use to back their price gouging claims? Try none.

In 2005, Sen. Maria Cantwell (D) of Washington responded to a question on whether she believed oil companies were price gouging, “[a]bsolutely.” she said. “I just don’t have the document to prove it.”

And this past May, in a speech on the House floor, Rep. Debbie Wasserman Schultz (D) of Florida targeted oil company executives when she said, “I can’t say that there’s evidence that you are manipulating the price, but I believe that you probably are.”

Shouldn’t we demand more from our politicians than unfounded accusations?

These congressional hearings are often followed by attempts to impose so-called windfall profits taxes on oil companies. The process is reminiscent of the medieval practice of trial by ordeal, in which the accused are subjected to a painful – possibly fatal procedure – with the expectation that the truly innocent will be saved.

So far, the oil companies have survived. The most recent attempt to impose such a tax on “unreasonable” profits failed in June.

And just what do congressional advocates of a windfall profits tax consider unreasonable?

In the first quarter of 2008, Big Oil had a profit margin of 7.4 percent. Over that same period, the pharmaceutical and medicine industry earned a 25.9 percent profit, the chemical industry earned 15.7 percent and the electronic equipment industry earned 12.1 percent.

What about those movie theater refreshments? Four large popcorns and four large sodas cost $31.50. The total raw ingredient cost is approximately $7.56. That equals a 76 percent gross margin. Where is the political outrage over that figure?

Still believe it is the oil companies gouging us? Speaker Nancy Pelosi seems to.

Ms. Pelosi has called oil company profits “obscene,” and recently supported yet another measure to investigate alleged oil industry price gouging.

Let’s take a look at where each dollar spent at the pump goes. In the first quarter of 2008, the majority – 70 cents – was spent to purchase crude oil, 17 cents was spent on refining and retailing, and 13 cents on paying taxes.

American oil companies cannot change the largest factor influencing gasoline prices – the cost of crude oil.

In The New York Times, columnist Edmund L. Andrews asked satirically last year “if the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s? For that matter why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?”

Pelosi never decried this “obscene” lack of profits and shareholder abuse. Instead, she seeks to punish an industry that makes a modest profit margin on a high demand good.

 

Justin Danhof is a research associate with the National Center for Public Policy Research, a nonpartisan, nonprofit educational foundation based in Washington.

3 Responses

  1. Ok, so you have managed to address how much profit is made by selling concessions compared to how much it costs to provide the raw ingredients. Would you care to take into account the electricity and water bills at least for the concession stand? Oh, and don’t forget to include the utility bills for all the rest of the operations. Do you think that the ticket sales cover that? As part of my financial analysis class I reviewed the financial reports for the most popular movie theater in my home state. It was also the most profitable movie theater in the state. Just taking these few extra things into account, and believe me, there are other cost factors involved as well, you may find yourself retracting this statement. In business you can’t take one small portion and stick it in a vacuum tube to evaluate it; you have to evaluate the business as a whole. If you were to do that you would find that the “76% gross margin” is actually substantially smaller. Besides, who’s fault would it be if they were making that big of a profit? If people don’t like it, don’t pay the money. It’s not like they are being forced to anyway. That’s one big benefit of living in a free country.

  2. wow! a very informative and impressive reply. i agree 100% that all things need to be considered when evaluating an organizations true profit. additionally, though to some, gasoline is a luxury item, i beg to differ. it’s actually quite a necessity. that being the case, when price gauging occurs at the pumps the resolution is not as simply as not putting gas in your tank as there are no alternatives. with regards to going to the movie theater and purchasing items from the concession stand, it’s completely a matter of choice. for example, there were times when i wanted to see a new movie, however, i didn’t have the funds to purchase anything from the concession stand, however, i was still able to enjoy the movie. if my funds are low, there are no options available to me regarding putting gas in my car. i’m forced to pay what ever price is being asked. additionally, i’m an individual who prefers not to drive, unfortunately, again, there is no choice in the matter. my place of residence is a significant distance from my place of employment and there are no public trans systems that i can utilize and so i am forced to drive which means i am forced to put gas in my car regardless of price.

  3. I’m researching movie theaters for my school project, it seems that the big theaters (AMC, Cinemark, Regal), all averages around 20% income after operating expenses.

    This does not include taxes, depreciation, building costs, closing costs, interest costs, and a a ton of other things. Many large movie theaters are suffering.

    Small theaters have smaller operating costs (less employees, usually owning their buildings, no information system), however they get worst deals with their ticketing. The average is around 80% of a movie ticket price going towards studios.

    Smaller theaters also do not have the scale of economy to keep raw material prices of concession down, thus their material prices are a few cents larger which matters a lot for smaller venues.

    Finally, supply an demand of concessions needs to be taken in account.

    The demand of concession foods is limited by the number of shows a theater shows per day and the number of screens a theater has.

    Thus, if a theater can only show 4 shows a day, demand of popcorn will only occur 4 times a day during the 10min period before a movie starts.

    Looking at this, smaller theaters with low amount of screens or without the ability to operate multiple shows per day have few opportunity to sell their concessions.

    I suggest you do a 5 forces analysis of the industry before you decide to compare two industries to make a point.

    Or at least look at the income statement of leading companies in each industry. Theaters are not doing well at all.

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