Can Harry Potter Work Magic for Beleaguered Theme Parks?

With the unveiling of its Wizarding World of Harry Potter, Universal Studios Orlando has officially raised the bar for vacation attractions in summer 2010. A 20-acre area within the company's "Islands of Adventure" theme park, "Wizarding World" is designed to "bring the magic, characters, and stories of Harry Potter to life in ways never before imagined."

Universal's bold bid for vacationer dollars is only one of many strategies that theme parks are using to turn around an industry that has been brutalized by the recession. For the past two years, theme park revenues have slid precipitously, forcing companies to make hard compromises to stay in business. While some have invested in new attractions, others have cut expenses to improve their bottom line. Most parks have employed discounts, slashing prices in order to get cash-strapped customers through the gates -- a move that has undoubtedly hit the bottom line.

These strategies have had mixed results: For some parks, falling revenues have merely disappointed investors come earnings season; for others, the recession has cut far deeper. Last June, for example, Six Flags (SXFL) filed for Chapter 11 bankruptcy protection, while Disney (DIS) cut 1,900 jobs at its theme parks. And in October, Anheuser-Busch InBev (BUD) decided to sell its ten theme parks to the private equity shop the Blackstone Group (BX).

This year, things are looking brighter. A slowly-improving economy has driven hopes that the theme park industry might be poised for a turnaround and Six Flags is even emerging from bankruptcy. Yet with budgets still tight and customers addicted to deep discounts, the amusement industry's road to recovery will be a long and slow one.

Pulling in Customers with New Attractions

At a time when consumers are still gun-shy about spending it may seem counterintuitive to open a new park or invest in major new attractions, but that's exactly the tack that Universal Orlando and some other parks are taking. The Wizarding World of Harry Potter -- which is accessible with a basic $79 admission to the Islands of Adventure theme park -- enables visitors to buy wands at Ollivander's shop, candies at Honeydukes and novelties at Zonko's. They can mail things via the "Owl Post," eat dinner at the Three Broomsticks, and even tour the wonders of Hogwarts while waiting to take a ride on "Harry Potter and the Forbidden Journey," one of three new rides at the park. Although it just opened, the attraction has already been the subject of rave reviews in the press, and may even fill Islands of Adventure to capacity, forcing the park to close its gates.

Other parks are also investing in new attractions: Cedar Fair Entertainment (FUN), which owns eleven major theme parks in the U.S. and Canada, is expected to spend $80 to $90 million dollars this year on capital investment, up from $69 million in 2009, according to Morgan Joseph analyst Jeffrey Thomison. Among other things, this will pay for new thrill rides at North Carolina's Carowinds and Virginia's Kings Dominion theme parks. Thomison notes the boldness of this decision, pointing out that "In most seasons, the capital spending budget is set for one major attraction company-wide." By building two rides, Cedar Fair is expressing a great deal of confidence in this season -- and the future.

Addicted to Discounts

With vacationers are still skittish, many theme parks are sticking with a tactic that has yielded mixed results: discounts. The last two years have seen the industry "discounting earlier in the season, discounting deeper, and keeping discounts open longer," according to Dennis Speigel, president of consultant group International Theme Park Services. While such discounts have been able to keep people in the parks, per capita guest revenues have dropped sharply. In many cases, the lower prices have taken the form of cheap season passes: Speigel notes that season passes at some parks are only $10 above the regular full-price admission rate.

The problem is that Americans are now addicted to these discounts, and parks that are trying to wean vacationers off of these super cheap prices are finding that higher profits can come at a cost. Disney, for example, has slowly moved in this direction and while the company has seen a 5% increase in per capita guest spending, they have also seen attendance drop by 4%.

Summer 2010: A Mixed Tale of Gas Prices and Oil Spills

Lower gas prices should definitely help the theme parks this summer season. Gas prices have a major impact on attendance: In 2008, for example, record high prices at the pump kept vacationers at home until the middle of July when -- not coincidentally -- prices began to drop. Currently, however, European debt problems and a strong dollar are keeping prices down, a promising sign for many theme park owners.

While gas in the tank is a strong enticement for vacationers, oil in the ocean is another matter, and the BP spill is likely to cripple theme park tourism in the Gulf Coast area.Speigel says that companies with multiple resorts are shifting marketing dollars to areas that aren't affected by the environmental disaster, reasoning that customers aren't going to visit Gulf coast attractions, regardless of how much they spend on promotions. While this won't affect publicly-traded companies like Cedar Fair, Anheuser-Busch/Inbev and Six Flags, which don't have parks in the area, it will likely have a devastating effect on the dozens of attractions that count on tourist dollars in the Gulf Coast.