Euro Disney Case Study - Mangement Portal

The following report was written as an assignment in the authors MBA-course for the subject Managing Resources – Accounting. It was subject to a word limit, so that no deeper investigation was possible.

Question:
Were the 1992 and 1993 financial results for Euro Disney an indication that principal factors in the planning process were wrong?

1 Introduction – Euro Disney’s Plans and Reality

When the International Offer of Shares for the Euro Disneyland S.C.A. (in the following called Euro Disney) was published in October 1989 the plans for this new enterprise of the Walt Disney group were ambiguous. The financial plans for the first year of operation projected total revenues of FF 5,482 million and a net profit after taxation of FF 204 million. For the following years the development should be even more impressive. At that time the plans were seen as a consequent application of the concepts of the existing Disney-designed theme parks.[1]

Just a short time after Euro Disney was opened in time on April 1992 it was obvious that reality would not meet the plans. In November 1992 the financial reports for the year ended 30 September 1992 were published which included the first 172 opening days of Disneyland Paris. There the management had to announce a loss of FF 188 million. The second year was even worse. Although Euro Disney nearly met plans for guest attendance, they faced a loss of FF 5,337 million whereas total turnover was FF 5,725 million. Plans for the second year of operation (1 April 1993 to 31 March 1994) forecasted a turnover of FF 6,801 Mio and a profit of FF 359 Mio.

The scope of this assignment is to find out if these financial results were an indication that principal factors in the planning process were wrong. For this the author will compare the plans and actual results for Euro Disney’s first two years, analyse major premises Disney set when planning for Euro Disney and analyse the steps of the planning process. The base for this analysis will be mainly the profit and loss accounts.

Normally there are several ways to reach an organisations goal. To determine the way to this goal which is for most organisations – except non-profit ones – the maximisation of profit, a plan is needed. Planning means to decide for one of the possible ways given.

In the first step it is important to gather as much information as possible to provide the best basis to decide for the plan that promises best results. Because of the future nature of planning there will not be complete information. This requires some estimations. Therefore all plans include more or less elements of uncertainty and risk.[2] Since planning is essentially about the future, the results and information from the past usually are only relevant as the basis from which to forecast.

On the basis of the information available and the projections of possible future developments it is possible to retrieve alternative plans for different scenarios. In spite of the uncertainty of the future, planning offers the means to evaluate alternative proposals. This should reduce uncertainty and risk.[3]

Planning is involved in various kinds of decisions, but especially important for major decisions concerning the overall future strategy and large investments. Such issues are very risky since they require a high spending of capital and have an long-term influence on the future development of the organisation. One example is the foundation and setting-up of a new company.

A direct comparison between the plans for Euro Disney as given in the Offer of Shares and the results presented in the financial reports is not possible for the following reasons:

· The Offer of Shares refers to a complete year after the opening of the park, that means from April 1^st to March 30^th of the following year. The financial reports refer to the financial year beginning October 1^st and ending September 30^th of the following year.

· The details given in the Offer of Shares and in the financial reports refer to different positions of the profit and loss accounts. Therefore it is not possible to compare the composition of the positions and analyse reasons for differences.

For this reasons all conclusions given below should be evaluated carefully. For a more detailed analysis additional information would be necessary[4].

To be able to make a general statement this report will compare the plans for the first and second year of operation with the financial years ending September 30^th 1992 and 1993. At least the last one will provide the opportunity to compare two periods of twelve months of operation. This comparison is provided in appendices 1 to 3. With a stress on the second year – as explained above – the following conclusions can be drawn:

· In the first year Euro Disney nearly met expectations for revenues and operating expenses of the Magic Kingdom. With no operating profit from the resort and property development sector and higher than planned general and administrative costs it failed to meet the profit projection by FF 392 Mio.

· In the second year again revenues from the Magic Kingdom reached the planned level but operating expenses for this exceeded plans so that the operating profit was below expectations.

· Again there was no significant operating profit from the resort and property development operations.

· As a result the profit before exceptional profit and taxation missed plans by FF 2,332 Mio.

Although the comparisons are influenced by some differences in the timely periods which might decrease their reliability they allow the general conclusion that Euro Disney by far missed its plans. The company faced threatening losses instead of immediate profits.

A detailed overview of Disney’s planning premises for its European theme park as it can be retrieved from the Offer of Shares is given in appendix 5. From this it can be seen that the main ideas and principles were the following:

· The planned Euro Disney theme park was seen as such a unique project that it would be a monopolist; revenues were planned remarkably above the market level.

· Disney drew conclusions from the successful development of Disneyland Tokyo which was seen as a prove that the strictly American philosophy of Disney could be implemented without major change in other cultural environments.

· Disney had two externals – Arthur D Little (in the following: ADS) and Petiteau Scacchi, the French member firm of its auditor Price Waterholes - examine its plans and the underlying premises.

Besides this the plans for Euro Disney were driven by the wish to avoid the limitations for profit generation faced in other theme parks. These were the facts that Disney owed only a small number of the hotels around its existing theme parks[5] and that it did not own and operate the Japanese theme park by itself thus only receiving pre-defined royalties. The author assumes that the latter one originally was organised that way to limit the risk of a high investment in a so far new cultural environment.

The following analysis of Disney’s planning process and premises for the European theme park takes assumptions for Disney’s activities concerning the three planning steps. This is done with the help of examples. Not all issues connected with the original plans are covered.

In general the last three of the above principles used by Disney to give the plans more reliability are all reasonable and necessary.

For the first planning step – the collection of information - a company has to base its plans for a new business in a new market-environment - amongst other information - on its experiences with existing activities. From the details given in the Offer of Shares it can be concluded that Disney did this quite carefully. Moreover the frequent stress of the positive experiences with the American and Japanese theme parks indicates that Disney was a bit too impressed by its own success. It is also the authors experience that companies which can refer to existing successfully performing businesses sometimes tend to be over-optimistic for their newly planned activities.

A second important group of information that has to be gathered are facts about the environment for the newly planned business (e.g. PESTLE-analysis). The offer of Shares indicates that Disney covered this field as well but obviously at least not all socio-cultural and economical issues were cared for enough.

The second step– the development of several alternative plans - requires an adjustment of the previous experiences to the special situation for the new business. Because of the uncertainty involved this should result in some different scenarios. These again result in different business plans. These alternative business plans include amongst others

· Forecasts for the development of revenues, costs and cash flow and other economical figures,

· Options to include or exclude additional business activities like in Disney’s case the resort and property development.

The sensitivity analysis presented in the Offer of Shares is an indication that Disney followed this step in its planning process. For the reason of assessment of plans under alternative future scenarios this sensitivity analysis presented to the public does not offer enough information. Its main weakness is that in each scenario only one factor is changed whereas all other factors remained stable. At least a combination of the factors which are most likely to change would have added more clarity.

There is no information available if Disney prepared a scenario with a high influence of cultural differences. But the reality showed that at least in the third step – decision for one plan – Disney underestimated the influence of cultural differences between America and Europe.[6] This had a considerable influence on the actual deviation from the plans.

In addition, Disney decided for a plan in which the underlying scenario sees a Disney theme park as a monopolist because of its quality and uniqueness. They did not take enough care for competitors offering different leisure and entertainment activities. This resulted in too high expectations of guest attendance figures and acceptability of planned admission fees, prices for food and beverages and merchandise. This assessment by Disney was supported by a report from ADL, stating that the assumptions for guest attendance and per capita spending were reasonable. On the other hand a report of Petiteau Scacchi gave a very cautious statement. It only said that the plans were consistent with the accounting policies, were correctly calculated and correctly compiled on the base of the assumptions. Since the auditors gave no statement that the planning premises were reasonable this should have been taken as a serious indication that there were some problems. In fact the theme park had to compete with other tourist attractions and theme parks around Europe. Thus there is no monopolistic position for Euro Disney but an oligopolistic one.[7]

As for the resort and property development business - which was an essential part of the plans for Euro Disney – the management decided for a scenario that assumes a stable property market in France for the years to come. This was based on an analysis by ADS, concluding a high influence of the Disney theme park on the property market of the local area. Despite this study the scenario seems to be optimistic since obviously no care was taken for a possible decrease or breakdown in the property market. It would have been more cautious to plan for a lower level of revenues and profits from resort and property development and leave the expected higher level as chance for higher-than-planned profits.

Euro Disney’s financial results of the years 1992 and 1993 by far missed the plans given in the Offer of shares.

This plans were mainly based on Disney’s experiences with its existing and successfully performing theme parks.

Although the planning process seems to have been carefully conducted and backed by analysis of external experts some significant failures occurred. From the financial results of the first two years of operation and from analysts comments on the actual development one can see that the problems resulted amongst other factors from the following general reasons:

Even though not all developments could have been predicted correctly at the time the plans were established, the above factors were not taken care for in the necessary extent in the planning concept. In this sense Disney decided for a too optimistic scenario.

Euro Disneyland S.C.A:   International Offer of Shares
                                 Annual report 1992
                                 Annual report 1993

Wöhe, G (1986), Einführung in die allgemeine Betriebswirtschaftslehre (Introduction in general business economics), Munich: Verlag Vahlen

Mills, R. W., Robertson, J. (1999), Fundamentals of managerial accounting and finance, Leclade: Mars Business Associates Ltd

Reekie, W. D., Allen, D. E., Crook, J. N. (1991),The economics of modern business, Oxford: Blackwell Publishers

[1] Concerning Disney-enterprises in this report uses the same abbreviations that are used as in the International offer of Shares.

[2] Wöhe (1986) page 125, 126

[3] Mills, Robertson (1993) page 170

[4] The information needed for an exact comparison can only be obtained with access to the companies – not published – accounts.

[5] Disney owns 5,700 of the 70,000 hotel rooms around Walt Disney World, Orlando and 1,000 of the 20,000 rooms around Disneyland California.

[6] The author sees the main cultural differences in the service mentality of staff and in the expectations of guests. Whereas Europeans visiting a Disney theme park in the USA expected a real American experience they felt “over-americanised” when visiting the same type of park in Europe.

[7] A detailed analysis of the market structure is given in appendix 6.