Euro Disney Case Study Appendices

As for nearly all ratios it was not possible to calculate them for the plans since no plan-balance sheets were given in the Offer of Shares. In general it is possible to develop a plan-balance sheet from the given Profit and loss-projections and Cash flow-projections. Especially for the profitability-ratios this would not provide much additional information. From the missing of profit projections we can assume that all profit related ratios are far below the projected level.

The above figure demonstrates that results in the second year of operation got even worse. Higher losses led to a decrease in shareholders funds and thus to a higher gearing. As often losses also caused a worse position in working capital and liquidity.

· In the first year the relation between revenues and operation expenses for the Magic Kingdom was nearly at the planned level. This has to be assessed under the view that the financial year only covered activities during peak season whereas the planes were made for a full year including low season.

· The company was not able to generate any profit from the resort and property development section which was planned to contribute to the overall operating profit with 22 %.

· The company overdrew the planned general and administrative expenses by FF 449 Mio or by 113.4 %.

· The direct comparison for year two shows that the revenues from the Magic Kingdom are slightly higher than the planned level. But this fact has to be evaluated very carefully since different periods of time are shown and first measures to attract more guests were taken during the financial year 1993.

· Guest attendance missed the planned level only by 1.74 Mio visitors. Hotel occupation only reached 55 % whereas 68 % were planned.

· On the other hand the operating expenses for the Magic Kingdom were significantly higher than planned. They were planned to be 60.9 % of the revenues; the real amount was 69.4 %. This difference of 8.5 % leads to an increase of expenses of FF 414 Mio – related to the actual revenues.

· The revenues and operating profits from Resort and Property development again failed to meet expectations. That’s why the company misses another FF 638 Mio of planned operating profit.

· Only depreciation which is influenced by the investments in fixed assets and royalties which are related to the success of the company met the planned level.

· The lease expenses exceeded plans significantly by FF 762 Mio (80.2 %). There is no explanation for the composition and development of this position in the published report. In general it can be assumed that the company exceeded its planned investments at the expense of leasing contracts[1]. This theory is supported by the results of the first year where the leasing expenses in six months of operation were 74.7 % of the amount planned for twelve months.

· The general and administrative expenses highly exceeded plans by FF 449 Mio (113.4 %). Again there is no explanation given. Such a high exceed of plan often is a sign that there occurred some problems and developments that have not been taken care for in the planning process.

· Interest expenses were higher than planned. There could be a connection to the unplanned leasing activities since they include an interest fee as well.

Appendix 6
Market structure
Comparison of the assumptions in the plans and the actual situation

In Disney’s offer of shares is clearly and repeatedly stated that they see the Euro Disney theme park as a unique attraction of high quality. In addition prices for Euro Disney were set at a higher level than all other European theme parks and even at the Disney theme parks in the USA. This resulted in too high expectations of guest attendance figures and acceptability of planned admission fees, prices for food and beverages and merchandise. It can be summarised that the Walt Disney group saw its planned European theme park as a monopolist in the market segment described below. In addition, they had a strong focus on guests who spend several days in the Euro Disney park. The information in the offer of shares indicate that the market segment for Euro Disney was as follows:

· High quality theme parks and other family and adult orientated high quality entertainment

In literature a monopolistic market structure is described by a sole supplier with no rivals and high barriers to entry. In the result the monopolist has the power to determine the price and can act as a price maker.[2] Because this theoretical model is rarely met in reality, a monopoly is often assumed if there is at least one large dominant player, only few smaller competitors, few substitutes and high barriers to entry.

In fact, a view at the existing theme parks in Europe in the early 1990 reviles that these parks were all smaller than Euro Disney and were less known throughout the continent than the world famous Disney brand. The barriers to establish an other really Disney-like theme park of that size and quality were enormous. Influencing factors were the high capital outlay required, Disney’s experience in the construction and the management of such parks and the high customer awareness because of a Disney brand. Taking this into consideration, the assumption of a monopolistic position of Euro Disney in the market described above was reasonable.

In the years 1992 and 1993 it became obvious that customers did not behave the way it was predicted for a monopolistic market. Especially the acceptance of the prices was considerably lower than expected. Levels of guest attendance nearly reached the planned level. But in connection with the lower revenues from food and beverages as well as from merchandises it can be concluded that the overall price level was perceived as too high. This assumption is proved by the fact that later on Euro Disney was only able to increase the guest attendance by a price reduction in connection with a segmentation of prices relating to seasons. The theme park was not able to act completely as a price maker.

This development is closely related to the fact that customers did not see Euro Disney as a unique experience without substitutes. Firstly, European customers perceived Euro Disney more as a one day or short trip destination, thus comparing it with a far wider range of attractions for short term excursions. Secondly, customer who were willing to pay the high admission fees, tried to limit their spending by substituting food, beverages and merchandises with a higher attendance of the attractions in the park.

So the characteristics of a monopolistic market did not prove to be applicable. The actual forces in the market indicated the structure of an oligopoly. In an oligopoly there are few suppliers, their products might be the same or different – but than substitutes – and the reactions of the market players are interdependent. These reactions and interdependencies influence the pricing strategies.[2]

Taking into account the development and the results of the years 1992 and 1993 it can be concluded that Disney’s mistake concerning the market structure was not a wrong assessment of the structure of its perceived market segment. On the contrary their definition of the target market was wrong. The actual market Disney is acting in is characterised as follows:

· Theme parks, tourist attractions and entertainment facilities, suitable especially for one day or short term stays.

[1] An investment can be financed by a leasing contract to split the money payable for it to smaller amounts due in a period of years. This method can be used if no more bank-loans, shareholders funds of other funds for an immediate payment can be obtained.

[2] Reekie, Allen, Crook (1991) page 59