Graphic: Mint
Graphic: Mint

Multiplex drama: What’s the fair price of popcorn?

Sales of food and beverage items are the second largest source of revenues for PVR and Inox, after net box office revenues

Shares of multiplexes PVR Ltd and Inox Leisure Ltd fell on Friday, plummeting as much as 13% and 5.4%, respectively.

What caused the panic?

Ravindra Chavan, minister of food and civil supplies in the Maharashtra government, said in the state legislative council that movie watchers in the state would be allowed to take outside food into multiplexes. He added that food stalls at multiplexes would have to sell packed products at the maximum retail price (MRP).

If this gets implemented, it would bite into the revenues that multiplex firms generate from selling food and beverage (F&B) items. F&B sales are the second largest source of revenues for PVR and Inox, after net box office revenues. Both companies have a substantial presence in Maharashtra.

According to their March quarter earnings presentation, PVR had 157 screens in Maharashtra out of a total 625 screens. Inox had 118 screens in Maharashtra out of a total of 492 screens.

How much is at stake here? For fiscal 2018, the proportion of revenues from the F&B segment in the total pie for PVR and Inox is 27% and 22%, respectively. However, the impact on profitability is meaningful as the segment’s net contribution (gross margins) is about 75%, pointed out Karan Taurani, vice-president-research, Dolat Capital Market.

“If consumers are allowed to bring their own food or if F&B prices take a knock owing to regulatory changes due to the current case, then there can easily be a risk of up to 20% downgrade in forecasted earnings for both companies," said Taurani.

That is why investors are worried.

The trigger for the government’s announcement is a public interest litigation (PIL) case filed in the Bombay high court (Jainendra Baxi vs. State of Maharashtra) stating there were no provisions that banned people from taking personal food items into movie theatres. Thus, by preventing outside food in theatres, multiplex owners are able to charge exorbitant prices for F&B items sold on their premises.

If multiplexes are eventually pushed to sell food products at relatively cheaper prices, says Abneesh Roy, senior vice-president, Edelweiss Securities, then multiplexes could make tickets more expensive, to lower the impact.

But if ticket prices are increased, then investors must watch the impact on occupancies. “There can also be a scenario over the long term, wherein occupancy may move up significantly if outside food is allowed and F&B prices in the multiplex premises are a little lower," says Taurani.

It’s worth noting that the Maharashtra government has not yet issued a circular regarding this. The government is expected to introduce a policy after considering the grounds raised in the PIL and suggestions made by the multiplex association. The next hearing on this matter is on 25 July.

Importantly, if pricing gets affected as a result of this case, it would raise a number of questions of principle.

What signal will such price control send to the business community at large? Is it contradictory to the much-flaunted ease of doing business? What about security and cleanliness issues inside the multiplex premises if consumers were allowed to take food inside? After all, consumers do have a choice of watching content on over-the-top platforms such as Netflix.

The verdict on this matter can potentially be a strong precedent for other states as well. Ultimately, it boils down to who decides what the fair price of popcorn is.

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