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Munger is Dead Wrong


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On movie theater food:  If the various transcripts are reporting it right, which I assume is the case, then Munger's thoughts on why movie theater food costs much more than it does at other places.  It's not because the cost is insignificant compared to the movie tickets or the movie theater experience.  It's because the theater has its customers captive, not allowing outside food or drinks into the establishment.  So they create for themselves a sort of "mini-monopoly" and for the 1.5 to 3 hours they have customers captive, they can charge outrageous sums for people to eat/drink.  This is hardly a deep insight which is strange that Munger has it wrong.

 

For those that still disagree with me, let's assume that movie theaters changed their policies to allow food/drink from the outside in.  That would significantly hurt their concession business.  Maybe people would still get popcorn because there's no close substitute for that, but candy and soda could easily be brought in and few would choose to buy it at the concession stand at inflated prices.  This would debunk Munger's thesis. 

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Guest misterstockwell

It may be possible that Charlie hasn't stepped foot into movie theater since the original premiere of The Sound of Music.

 

I just saw him pounding a huge box of junior mints at Transformers 3 in 3D.

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Movie theaters sell popcorn and refreshments at their marginal costs which may (or may not) make the refreshment costs appear insignificant compared to the movie ticket price.

 

Recognize that not all consumers are the same and some will buy popcorn and others will not.  Therefore, it is best for the movie theater to price the popcorn at the marginal price, not at the highest price.

 

In addition, many contracts to rent the movies to the theaters call specify that the price of popcorn (i.e. refreshments) can only be so much.  Why?  Because the movie industry knows that super high popcorn prices will keep movie goers away.  Therefore, I believe Munger is correct and prices are not what they are because the theaters have a captive audience.

 

 

Cheers

JEast

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It may be possible that Charlie hasn't stepped foot into movie theater since the original premiere of The Sound of Music.

 

I just saw him pounding a huge box of junior mints at Transformers 3 in 3D.

 

I don't believe it.  He would have snuck in his own box of See's peanut brittle. :)

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Having three kids who love to go to movies I have some experience with this topic (large Cineplex in greater Vancouver). To get in, kids pay $9.50 and adults $12.50. Large popcorn is $6.00; large fountain soft drink is $3.00; I think the kids pack (small popcorn, drink and candy) is $6.00

 

Snack lines are ALWAYS jammed full.

 

Most people (from what I can see) DO NOT bring snacks into the theatre (not cool).

 

My read is theatres charge crazy prices for food/drink because they have a captive market that is (obviously) willing to pay.

 

PS: we actually buy our Cineplex tickets at Costco:

$9.50 for 1 kid admission (price includes $6.00 kids snack pack)

$24.50 for 2 adult admissions (price includes 2 drinks and 1 large pop corn)

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My read is theatres charge crazy prices for food/drink because they have a captive market that is (obviously) willing to pay.

 

 

I agree, the major driver for high prices is "supply and demand".

 

I remember hearing a comic at the Improv in Los Angeles (I think it was a young Jerry Seinfeld) that said "you know the candy at a movie theater is expensive when they sell it from a jewelry display case"!

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On movie theater food:  If the various transcripts are reporting it right, which I assume is the case, then Munger's thoughts on why movie theater food costs much more than it does at other places.  It's not because the cost is insignificant compared to the movie tickets or the movie theater experience.  It's because the theater has its customers captive, not allowing outside food or drinks into the establishment.  So they create for themselves a sort of "mini-monopoly" and for the 1.5 to 3 hours they have customers captive, they can charge outrageous sums for people to eat/drink.  This is hardly a deep insight which is strange that Munger has it wrong.

 

For those that still disagree with me, let's assume that movie theaters changed their policies to allow food/drink from the outside in.  That would significantly hurt their concession business.  Maybe people would still get popcorn because there's no close substitute for that, but candy and soda could easily be brought in and few would choose to buy it at the concession stand at inflated prices.  This would debunk Munger's thesis. 

 

Just read the transcripts in question and it seems to me Munger is touching on the concept of Lollapaloozas with respect to candy bars etc at the theater example.  There are a lot of factors at play including relativism (individual items are all priced less than actual ticket and far less than if say one adult bought everyone's ticket), social reinforcement (big lineups means it must be worth buying if they are all buying), social conformity/envy (people who bring in their own stuff are cheapskates), good citizenship (rules say no outside food allowed - does this apply to the dinner I just ate? - no just the stuff they sell too), consistency/habit (lined up and got expensive stuff last time so do the same this time) and probably a few more to boot.  That's how I read it.

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Guest Hester

I mostly agree with Buffett_Munger (the board member). I think it's partly captive audience and it's partly the concessions are part of the movie theater experience.

 

A better comparison is sports games. I don't know about the rest of the league, but at Chicago Cubs baseball games, 1 beer is $7, a small bottle of water is $4, a crappy little hot dog is $5 (just dog/bun/relish). One friend of mine spent $20 on the ticket to get in, and spent $24 on refreshments (2 beers and 2 hot dogs). Let's not even talk about parking and memorabilia.

 

But it was a hot day, he was captive for 3 and a half hours, and was thirsty/hungry. And going in he expected to blow some money. It's accepted as part of the experience.

 

But it's CERTAINLY not due to being an insignificant cost relative to the ticket.

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Lets see.  Assume the movie theater real estate, property tax, and heating/cooling, is paid for by the flicks being shown.

 

Then we have:  3 students per concession section (2 movies) making $9/hour for 3 hours ~ $100

Sell to 100 customers per 2 movies:  $8.00 per person = $800.00

Assume 100 servings of pop and popcorn:  $2 cost per person.

Cash flow = 800-100-200= 500/3 hours

10 theaters - 2 sets of 5 concessions = 2500 per 3 hours

 

I have always understood that Movie theaters make the bulk of their profits from the concessions.  Harold Ballard (of Maple Leaf Gardens and Toronto Maple Leafs) understood this in 1965 when he raised the temperatures during a Beatles concert to sell more pop. 

 

I guess the best way to prove Munger right or wrong is to read the Cineplex Report which i have not done.

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It's the captive audience and the fact that the theatre basically makes no movie off of the ticket sale.  The studios make most of the ticket sale money (I think 80c of every $1 of a ticket sale goes to the studio.)  The theatre then pays FTE, PTE, rent/taxes, water, power, etc. with concession sales.

 

So, given that fact, the theatre pretty much has to gouge on the concessions given the fixed amount of food per person (e.g., very few people would buy 2 buckets of popcorn even if the theatre cut the bucket price in half.)

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On movie theater food:  If the various transcripts are reporting it right, which I assume is the case, then Munger's thoughts on why movie theater food costs much more than it does at other places.  It's not because the cost is insignificant compared to the movie tickets or the movie theater experience.  It's because the theater has its customers captive, not allowing outside food or drinks into the establishment.  So they create for themselves a sort of "mini-monopoly" and for the 1.5 to 3 hours they have customers captive, they can charge outrageous sums for people to eat/drink.  This is hardly a deep insight which is strange that Munger has it wrong.

 

For those that still disagree with me, let's assume that movie theaters changed their policies to allow food/drink from the outside in.  That would significantly hurt their concession business.  Maybe people would still get popcorn because there's no close substitute for that, but candy and soda could easily be brought in and few would choose to buy it at the concession stand at inflated prices.  This would debunk Munger's thesis.  

 

 

Everyone has missed the point of movie popcorn prices  It's the opposite of what rational economists would expect!  Having to pay a pretty penny for popcorn is part of the movie experience!  Imagine a young couple or a group of young people of modest means going out on a date.  Paying an exorbitant price for ordinarily inexpensive items that would not usually be consumed is an affordable way to impress a date, friends or family members.   It's like paying a lot more for a box of Sees Candy than a bag of Hersheys Kisses.  :)

 

 Would anyone be stupid enough to throw a bag of cheap candy in front of his sweetheart on Valentine's Day?  The reaction might be about what one would get if one were foolish enough to try to impress a date by sneaking candy into a theater.  :)

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I think that you guys are missing that there are a lot of factors that go into the price of concessions... There are different ways in which the whole thing effects individuals. While I don't completely agree with Munger, and think that creating an artificial shortage does help them get pricing power, he does have a point with it being part of the overall experience.

 

There is certainly a social stigma against sneaking food and drinks into the theater, and frankly, even if they would allow you to bring stuff in, a lot of people wouldn't do it. I would associate it to using a coupon at a restaurant when you take a girl out on a date... Generally, if you do that, she isn't going to be that impressed. Though, I would venture to guess that a lot of the significant others of the posters on this board embrace frugality... but remember; not many of us are conventional.

 

Furthermore, there is nothing like having a big-ass tub of movie theater popcorn with the fake butter on it, some candy, and a huge pop. Whether you do so in your own life of not, it is a great part of the experience for a lot of movie goers.

 

Regardless, with this topic and many others, it is generally a bad mistake to say "y is so, because x is this way... and it is the case 100% of the time."

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Question for the movie fans/investors on this thread:  Would movie theater antitrust (US vs Paramount Pictures) reversal make things better vis a vis lower ticket prices or lower concession prices?  Vertical integration may actually make theaters more profitable and allow more variable ticket pricing.  Say the new X-men movie playing at the Sony owned theater gets an exclusive mark up - $25 per seat.

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Lets see.  Assume the movie theater real estate, property tax, and heating/cooling, is paid for by the flicks being shown.

 

Then we have:  3 students per concession section (2 movies) making $9/hour for 3 hours ~ $100

Sell to 100 customers per 2 movies:  $8.00 per person = $800.00

Assume 100 servings of pop and popcorn:  $2 cost per person.

Cash flow = 800-100-200= 500/3 hours

10 theaters - 2 sets of 5 concessions = 2500 per 3 hours

 

I have always understood that Movie theaters make the bulk of their profits from the concessions.  Harold Ballard (of Maple Leaf Gardens and Toronto Maple Leafs) understood this in 1965 when he raised the temperatures during a Beatles concert to sell more pop. 

 

I guess the best way to prove Munger right or wrong is to read the Cineplex Report which i have not done.

I attended a dog and pony for Cineplex I seem to remember someone making the statement that their gross margin on a box of popcorn was 95%. I also remember that one company a private one provided a pretty decent share of the popcorn to the movie theatre industry and it was a VERY profitable business.

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Guest ValueCarl

It's funny because when we met for lunch after wards, I mentioned to Brker_guy and some other friends that, I believed Mr. Munger never finished his explanation behind the movie theater topic because he jumped right into the automotive "add on features" insignificant theme. I knew there was no correlation to his first question, and so did they.

 

One of our group friends, Al, astutely pointed to the "monopoly," captured audience thesis being discussed on this board.

 

To be sure, Mr. Munger is a wonderful man and a genius but it's not impossible for him to have senior moments as he grows in age.  ;)

 

Clearly, he NEVER broached upon the explanation of his first question relating to popcorn and movie theaters!  ;D

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I'm a bit skeptical of the time monopoly theory simply because the costs of sneaking food are so low. Your maximum financial loss is capped at the ticket price. I couldn't find any estimates on the likelihood of getting caught, but it's not as if you have to hide Twix in your butt. I have eaten a panini in the theater and my lifetime hit rate is 100%.

 

Another thing is that high traffic areas frequently have multiple theaters offering similar movies. If consumers are sensitive to the price of consumables, then wouldn't these theaters compete on that basis? Or do seats fill up so quickly that theaters can charge whatever they want during attendance peaks? In which case, wouldn't we expect more variable pricing throughout the year and time of day?

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With all these theories, there are probably ways to just test this.  The result of which could have significant ramifications for how you price things in a movie theatre.  Munger has read "the plex" and should really advocate the data-driven optimization approach Google uses to gain insights into how things work.

That being said, data mining cannot replace intuition, but still, more tools are available to verify theories today than any point in history.

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If movie goers had any clue what they were doing to their bodies this stuff would be illegal to sell:

 

In a 3 hours sitting, if you consume a large popcorn washed down by a large soda then here is what you've done to yourself, roughly speaking:

 

Large Popcorn:

 

A large popcorn from a movie theater on average contains around 20 cups of popcorn. Including the non-hydrogenated soybean oil topping, aka "butter", you devoured 1,200 calories, and 60 grams of saturated, artery-clogging fat. That's the equivalent of two Pizza Hut Personal Pan Pepperoni Pizzas, plus an extra two days' worth of saturated fat. Wait, we're not done yet. In order to make your large popcorn taste even better and ensure you buy that large soda combo, the large popcorn is coated in a massive amount of sodium. Up to 1500 mg in fact! That's more than an entire days worth.

 

Large Soda:

 

A large soda ranges from 44 ounces (5 1/2 cups) to 54 ounces (nearly 7 cups)  for an extra 400 to 500 calories and 26 to 33 teaspoons of sugar.

 

If you go for the combo:

 

1700 Calories

1500 mg Salt

60 g saturated fat

30 teaspoons of sugar (roughly 2/3rds cup)

 

So, next time you go to the movies ...

 

Take a small bag of home made trail mix and a bottled water!

 

<IV

 

 

 

 

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