We all face the Disney Conundrum

Many, many years ago I sat in a high school economics class wondering how students around me didn't understand a basic principle being taught. If I'm honest, this was a rare event for me. Typically I was in the middle of the pack for understanding new concepts but this time was different.

It was simple math actually. You have supply and demand, which drives your revenue; then you have your business expenses. In the end whatever is left is your profit. Demand drops, you must adjust to minimize the impact on your final profit.

Taking a look at Disney's current situation (in a very simplified manner) we can see red flags which we must all acknowledge for our own businesses, departments and personal lives. This isn't about questioning or attacking Disney; hopefully this will help identify ways to overcome your own challenges as we all "pivot". History shows us we either learn to adapt or become the next Blockbuster, Montgomery Wards or Borders Bookstore.

Cross-merchandising is great...until it kills you

Disney essentially has three primary revenue streams. Movies/TV, Retail and Theme Parks. (again, simplifying for easy discussion).

Movies/TV directly impact retail (hello "Baby Yoda" t-shirts, cereal, toilet paper, flamethrowers, etc.). The combination of movies and retail help to hype up the desire to visit their theme parks (this Star Wars geek can't wait to see the Millennium Falcon).

Walk through Walmart, Target, the Disney store at the mall or scroll through Amazon and you know which Disney princess has a sequel coming out and which Marvel character is that month's primary focus.

Shut down the movie revenue stream, retail gets crushed. Or get a little retail involved and suddenly a movie has some staying power in a theater. They depend on each other. Get enough combined hype (and sequels) and now you get Toy Story Land.

Value must equal the cost to the customer

My wife and I have two kids ages 9 and 12. The last few years we saved up to have a trip to Disney World in November 2020. Our first trip back in 2017 was a lot of fun and our kids were excited for the opportunity to experience it all again. After discussing the "value" of the trip, even my 9 year old daughter (hello perfect target market for Disney) was against going this year.

Let's look at the major changes a customer faces when heading to the park.

1. Temperature checks at the gate could result in getting turned away - What if the machine is wrong? What if my daughter is running a random fever (as she's known to do)? Getting turned away due to a rogue fever is worrisome.
2. No hugging the characters - This will be a bit hard on my daughter but it's not a decision maker. "Happiest place on Earth" no longer applies BUT getting to wave and say hi still makes my daughter smile so it's OK.
3. Ever been to any theme park on a low-attendance day? Half of the carts and little extras along the way end up being closed. Rides are "closed for maintenance" when really they don't want to pay for someone to run the ride or the electricity it takes to run it. Will my favorite rides at Disney be closed?
4. Let's stay until the park closes and enjoy the fireworks...said people in 2019, not 2020. There goes another perk to the park, taking away the special little things like fireworks and holiday events.
5. Park hours...less is not more. The parks are on shortened hours, opening later and closing earlier. They've also taken away the park hopper option. Which means you either hit the rides you REALLY wanted to ride on the day you're in a specific park or you're just out of luck.

What hasn't changed...$$$

Let's say we had a budget of $8,000 for a week-long trip to Disney (with a day at Universal because... Harry Potter). Now put in a risk of being turned away for a random fever, questions if things will be fully open, less "perks" and fewer hours to enjoy the park. Now let's say Disney hasn't reduced the price of admission to match this weaker experience.

Even my 9 year old daughter understands the economics and recognizes it just isn't worth it.

All three spiraling out of control

Disney Execs have to put pride and ego aside (and even investors with eyes only on the short-term) and pivot before the House of Mouse is vacant. Trolls 2 was released to Video On Demand (VOD) and made more for Universal than the original...without theaters. What if Disney (and every other movie studio) ignored previous revenue estimates? If they released Black Widow in October to both VOD and theaters, the toys would also ramp up for October and November sales (leading into Christmas).

Let's say there are 20 new movies ready for release by movie studios. If two are released every two weeks we'd have new movies and potentially related merchandise through Christmas. That's three months worth of cash coming in the door rather than being forced to close retail stores and movie chains shuttering for the foreseeable future.

Want to save those theme parks? If the perceived value of a ticket in 2019 was $100 and now it's $75...you won't sell tickets at $100. And if rumors are true about 2021 price increases, customers won't pay $125 either. Accept the temporary setback and adjust accordingly. Either get the "value" back up, or lower your prices.

The elephant in the room

No not Dumbo. Even if we have a miracle vaccine around November 5th of this year, our economy will take a while to bounce back. All of these 2020 movies getting pushed to 2021 will result in multiple "block busters" being released back-to-back. With less disposable income in the market place, will those movies truly make as much money as they would have? Failure to plan for a prolonged recession is irresponsible for the entertainment industry (and every other industry).

How does this apply to the rest of us?

Let's make some simple assumptions first.

1. Oil prices will remain low due to lower demand through 2021
2. Taxes will increase (regardless of election results)
3. Remote working will not remain at 100% for most people

We must accept that revenues and overall budgets will be strained through 2021. Risks will increase with strained economics (people in tough financial situations are at risk of falling to the temptation to commit fraud, plus those in sales will be pressured to get deals done to get revenue back on track). Additional audits will be needed but you won't have the staffing nor the budget to address them.

Those in the accounting and internal audit industries must be aware of these upcoming challenges and start having those tough discussions. Be fully prepared for your November Board meetings to discuss what 2021 "pivots" will be needed. Likewise Board members must be prepared to ask those tough questions and challenge management's inclination to move back to a "business as usual" stance.

Written by Thomas Mullinnix. Founder, Re-Vision Management Consulting, LLC. [email protected] www.r-vmc.com