Tuesday, March 17, 2009

Euro Disney or Euro Disaster

Written with Mahendra Madhavan for a case study in our Global Financial Management course.


For Walt Disney Company, Tokyo Disneyland failed. The arrangement for the Tokyo theme park capped profits for the Walt Disney Company. Blinded by the success of its first international theme park and failure of the profit, Walt Disney Company was focused more on declaring a profitable arrangement, than asking the marketing and financial questions that would lead to success.

Why Euro Disney did not succeed in Europe?

Euro Disney failed on many fronts. Walt Disney Company lacked understanding of the culture in Europe. Europeans, with 4-5 weeks of vacation, took destination trips, usually by airplane, on their work vacations. This cultural norm contrasted the easily accessible location Disney chose. Europeans did not consider Euro Disney a vacation spot; only, a place to spend a day. Location failure reduced the revenue generation inside the park, and the destination appeal of the park.

Modern imperialism consists of export the culture. American culture replaced prime French farm land with Euro Disney. French intellectuals considered the park a threat to future generations, who would lose their cultural identity and start speaking in English. Sensationalizing the cultural failure, some called it a “Cultural Chernobyl”.

Europe’s most severe recession since World War II, lead to an inopportune opening for Euro Disney. Furthermore, the strength of the French currency deterred Europeans from converting to the franc. The combination of the recession and currency exchange curbed spending by international travelers. During the 90s, currency situations in Europe created complexity for Disney. Either the park would manage desired exchange rates or settle on one currency.
Euro Disney and Walt Disney Company capital structure guaranteed profit for the Walt Disney Company, and drained the cash flow from Euro Disney. Walt Disney Company’s 49% equity stake, favorable royalty and management fees with scheduled increases was advantageous even if Euro Disney did not turn a profit.

Enormous interest charges on US$ 3.56 billion in debt arose from the highly leveraged capital structure with various creditors, including: syndicate of 60 international banks and, the French government. Adding to the weight of debt, construction was over budget by 30%. In the end, Euro Disney reported a $900 million loss in the first operating year. Debt restructuring two years after completion of Euro Disney, lead executives to admit original business plans have “weaknesses”. The royalty and management fees and debt service sapped the life out of Euro Disney.

Why Tokyo Disneyland succeeded?

Tokyo Disneyland was the first international theme park by Walt Disney Company outside of the United States. Built on a reclamated land east of Tokyo Bay, unlike Euro Disney, it was a phenomenal success.

Opening of the park coincided with the introduction of five-day work week in Japan and a strong, growing economy. Culturally, the Japanese were spending more time on leisure activities. Tokyo Disneyland became the symbol of a new a Japanese lifestyle – enjoying free time with friends and family rather than constantly working.

Disney cartoons and films were extremely popular in Japan and 200,000 Japanese visited Disneyland each year. Tokyo Disneyland made it possible for Japanese to visit the park without traveling to California. In addition, the fortunate location was accessible for 35 million Japanese within 90 minutes of driving distance. Contrary to Europeans, Japanese vacations were short, which made Tokyo Disneyland a successful tourist destination.

Tokyo Disneyland was designed for adults, particularly young couples. Prices were steep ($40 for adults), but the families sacrificed other activities. Enormous revenue generation paid off the debt in three years. Through the first ten years of operation, Tokyo Disneyland’s sales and attendance figures rose steadily.

What can be done to make Euro Disney a more profitable park?

Sales and Marketing. A growth strategy for the park would only be successful if it provides substantial increases in revenue. Pro forma statements from 1995 to 1999 (see attached) show the park must double revenue to approach profitability.

To do this, Euro Disney should modify the sales strategy to suit Europeans. At the time, individuals relied on travel agents and tour operators, which Disney had largely neglected. The company must actively cultivate relationships with tour operators to increase sales. In addition, marketing strategies must encourage tourists from neighboring countries to visit Euro Disney. Recent surveys indicate the German market accounts for 8% of visitors, 40% from France, 18% from Benelux (Belgium, Netherlands, and Luxembourg) countries and 15% from Britain (Ref. 1). The increase in visitors does not translate into profits; however, more foreign visitors will lengthen the average stay. Increasing length of on-site stay does translate into more auxiliary revenue: meals, rooms and Mickey Mouse ears. Profit doesn't come from the theme parks but from high-margin businesses such as hotels, restaurants and shops.

Increasing marketing and sales is a highly risky strategy. Recent gross margin is about 30% (see Normalized Income Statement), and the most recent figures show the net loss to be greater than the total revenue. Any impact on the top line carries greater costs in sales, general, and administrative, and will reduce gross margin.

Capital infusion / Walk away. Walt Disney could provide a capital infusion for Euro Disney. This action will not find approval from the shareholders of the Walt Disney Company; which essentially would prop up a separate legal entity, Euro Disney. Walt Disney Company’s cultural norm is a shareholder approach, but Euro Disney exists in a stakeholder environment. The French government, a syndicate of European banks, the French economy, and among others are stakeholders. This stakeholder approach eliminates Walt Disney’s ability to allow the park to go into receivership.

Coasting. A third alternative is allowing the park to generate a breakeven revenue. We termed this approach “coasting.” It saves face for the Walt Disney Company; hence, preventing the image of “Walt Disney” from being hurt internationally. To default on the park or continued failed expansions will damage the reliability of the company, and prevent future international endeavors in the BRIC (Brazil, India China) economies.


1. http://www.time.com/time/magazine/article/0,9171,901020325-218398,00.html


Anonymous said...


Anonymous said...

From the very beginning it seemed completely nuts to me to put a DisneyLand in France, a country that's known to be very proud of its own culture.