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Monday, August 12, 2019

Disney Theme Park Attendance and the Economy

by Ray Keating
August 12, 2019

Since the Walt Disney Company reported its latest quarterly earnings last week, there’s been a great deal of speculation as to the reason behind a drop in attendance – widely reported to be a 3 percent decline – at Disney’s domestic theme parks. Most of the possibilities being tossed around likely played a part. But another possible factor – which has not garnered any attention but at least warrants some degree of consideration – is the economy. Specifically, has the recent slowdown in economic growth played a part?

In its third quarter earnings report, Disney explained:

The decrease in operating income at our domestic parks and resorts was due to higher costs and lower volume, partially offset by increased average per capita guest spending. Higher costs were driven by labor and other cost inflation and expenses associated with Star Wars: Galaxy’s Edge, which opened at Disneyland Resort on May 31. The decrease in volume was due to lower attendance, partially offset by higher occupied room nights. Guest spending growth was primarily due to higher average ticket prices and increased food, beverage and merchandise spending.

The basic message here is that there was a decline in park attendance in the third quarter, but spending on average was up among those in attendance. That’s not necessarily a bad thing from Disney’s perspective in terms of increasing revenues while providing an improved experience for the guests in attendance. However, that only goes so far. 

Among the explanations for the attendance drop being noted are Disney managing attendance given the opening of Star Wars: Galaxy’s Edge in Disneyland; guests deferring visits until Galaxy’s Edge opens in Walt Disney World late this month; guests being scared off by the assumption of large crowds tied to Galaxy’s Edge; and guests deferring their visits until Galaxy’s Edge Rise of the Resistance joins Millennium Falcon: Smugglers Run in Walt Disney World on December 5, 2019 and in Disneyland in January 17, 2020. Plus, there’s been a good number of articles and podcasts talking about Disney pushing the prices for theme park admissions too high.

Again, any and all of these factors could be at work. But what about the economy? Obviously, an economic slowdown or recession does not bode well for theme park attendance or Disney’s overall business.

It must be noted that while the current economic recovery/expansion has been lengthy (the recession officially ended in mid-2009), the average rate of growth has substantially under-performed the historical norm. For example, the economy normally grows at 3.3 percent annually in real terms (4.3 percent during recovery/expansion periods), but it has expanded at only 2.3 percent during this recovery/expansion. More recently, from mid-2015 to mid-2017, growth slowed (averaging only 1.8 percent), and it subsequently picked up over the next five quarters (average growth of 3.1 percent) from mid-2017 through the third quarter 2018. 

But growth slowed in two of the last three quarters. Growth in the fourth quarter 2018 was only 1.1 percent, followed by a solid 3.1 percent in first quarter 2019, and then slowing to 2.1 percent in the second quarter 2019.

The first question is: Are we trending lower, or were two of the last three quarters mere breathers in terms of economic growth? Given that anti-growth, protectionist trade policies have taken a chunk out of U.S. economic growth (see my analysis here) recently, and there’s little reason to expect President Trump to reverse course and point trade policy in a more pro-growth direction, this stands out as the biggest threat to economic growth moving forward. For good measure, political uncertainty will increasingly come into play as the 2020 election gets closer.

The second question is: Given that the labor market remains relatively strong, how much have consumers taken notice of any slowdown and potential problems developing? Consumers tend to be followers, that is, they take their cues from what business is doing. That is, if business is investing, expanding and hiring, then consumers tend to be happy and spending. In the second quarter of 2019, the two biggest drags on the economy were declines in private investment and in trade. If those developments persist, recession becomes increasingly likely. 

But there are a lot of “ifs” in play here – more than typical – and the economy could go in either direction – up or down.

So, with one quarter showing a drop in Disney theme park attendance, we’re left to speculate and watch for further developments. In terms of what we’re watching, though, the state of the economy shouldn’t be ignored.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

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